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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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Some Call BUCA Charge for Switching Stop-loss Carrier Anticompetitive, While Others Say it’s a Cost of Doing Business for Unbundling a Critical Service

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Choosing the

Cracking the Code – ICD-10 is Upon Us!

INside the Beltway Congress Gets SIEF Briefing on Self-Insurance; SIIA Responds to Rigid Stance on 831(b) Captives

OUTside the Beltway SIIA Seeks Clarification of Connecticut’s New Rules Governing Stop-Loss Policies

New Developments for Ongoing Issues in the RRG Sector

Stop-Loss Captives Seen as Differentiator

PPACA, HIPAA and Federal Health Benefit Mandates The Cadillac Tax Part One: The Potential Impact of the Tax on Account-Based Plans (FSAs, HRAs and HSAs)

RRGs Report Financially Stable Results Through First Quarter 2015

Self-Insurers Should Heed New Cybersecurity Guidance Issued by NAIC

Section 4980D Excise Tax

SIIA Endeavors Opportunity is Knocking at the 2015 Annual National Education Conference & Expo

2015 Self-Insurers’ Publishing Corp. Ofﬁcers

Lynne Bolduc, Esq. Secretary

Volume 83

Bruce Shutan

EDITORIAL ADVISORS Bruce Shutan Karrie Hyatt

Erica M. Massey, President

September 2015

Right

HOSPITAL

Helping Employees AVOID Potential Harm

Written by Spencer Whipple and Benjamin Tabah

September 2015 | The Self-Insurer

STEEP Interface Fee

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IRE

Some Call BUCA Charge for Switching Stop-loss Carrier Anticompetitive, While Others Say itâ&#x20AC;&#x2122;s a Cost of Doing Business for Unbundling a Critical Service

he age-old argument about whether itâ&#x20AC;&#x2122;s better to bundle services or hire boutique providers will never be settled, but recent industry developments cast a spotlight on whether a standard practice associated with administrator services only (ASO) contracts has gone too far.

Written by Bruce Shutan 4

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STEEP INTERFACE FEE HIKES | FEATURE At issue is the “interface” fee that some BUCAs (Blue Cross and Blue Shield plans, UnitedHealthcare, Cigna, Aetna) charge self-funded employer customers in ASO arrangements for switching stop-loss carriers, which several industry insiders say is becoming so exorbitant in some cases that it’s anti-competitive, unjustified and bad for the consumer. These interface charges – also are known as access fees, connectivity fees, integration fees and stop-loss reporting fees – seek to cover the cost of generating reports that allow stop-loss carriers to pay claims An industry executive who asked not to be identified noted that Blue Cross Blue Shield of Michigan earlier in the year doubled its interface fee to $8 per employee per month (PEPM) from $4 when these charges average just $1 to $2 PEPM across the U.S. He also cited Independence Blue Cross in Pennsylvania for recently increasing its interface fee “very significantly,” but was unable to provide details.

“The increase in interface fees has negatively impacted customer choice, resulting in higher stop-loss premiums for employers,” the source says. Others on the brokerage side of the self-insurance industry who also asked for anonymity because of their relationship with various BUCAs griped that what was once a minimal expense has since become a revenue stream. They also cry foul about plan administrators even charging these fees when some brokers are actually the ones filing and tracking claims for their self-funded clients.

Cost of Unbundling But their view isn’t shared by everyone. Steve Touché, president of Lovitt & Touché and the only one interviewed for this article who would go on record, considers the

fee increases a cost of doing business. “It’s either viable with their own pricing and their own reinsurance, or it’s not,” he says. It’s also the nature of bundled services that certain tradeoffs come with a comprehensive approach to health plan management. “When you get into a selffunded TPA environment,” Touché observes, “in many cases you’re determining who all your players are and the rules to follow.” He says the flexibility associated with this best-of-breed approach, which allows self-insured employers to freely choose their own reinsurer, explains why TPAs thrive – hastening to add that industry consolidation has resulted in fewer choices being available. Blues plan policies pertaining to interface fees vary from one state to the next, according to Touché. In Arizona where his brokerage is based, for example, he says that when Blue Cross Blue Shield of Arizona acts as an ASO carrier, the issue is moot because self-insured employer customers are prohibited from using outside reinsurance in the first place. “They use their own reinsurance,” he explains, though adding “they’re starting to waver on that now.” He describes the practice as “a function specifically of how competitive the reinsurance is, because when I bundle those fixed costs with their network fees and admin fees, just those three things together have made them uncompetitive, they’re not in the right business. They’re going to get flexible if that’s the case.” Mining new revenue streams through ASO contracts make perfect sense when so many BUCAs are losing money on their fully insured business by having to comply with medical loss ratio requirements under the Affordable Care Act, according to a broker industry source with knowledge of the fee increases who also asked not to be identified. But she says the problem is that these higher fees are being passed along to their self-insured clientele, “whether they like it or not.” The lesson to be learned is they need to ensure that the fees are disclosed up front, she explains.

Anticompetitive Tendencies Meantime, the industry executive who provided details on Blue Cross Blue Shield of Michigan’s recent interface fee hike says the carrier is essentially charging 24% of the average stop-loss premium for a 2,000 life group that decides to purchase stop loss from another carrier. The number decreases with smaller head counts, he adds, mentioning the charge would be 17% of premium for 1,000 lives and 13% of premium for 500 lives. “It’s also interesting to note that the average profit-and-expense load for your typical stop-loss carrier is 20% in total,” the source observes. “In some instances, the penalty charged by Blue Cross Blue Shield of Michigan is greater than the entire profit-and-expense load that exists in most stop-loss arrangements.” He cites a Citigroup report that identified Blue Cross Blue Shield of Michigan as having the largest stop-loss coverage with $273 million of premium and a 56.7% loss ratio that’s well below the 73.3% industry average. “And if you assume that stop-loss carriers on average generate around 8% to 10% of premium in terms of profit or surplus,” he says, “this report would tell us that Blue Cross Blue Shield of Michigan is generating three times more profit than the average stoploss carrier, which is really tied back to the interface fees.” The source also says Blue Cross Blue Shield of Michigan, a nonprofit Blues plan, “has had the eye of regulators for some time,” noting a 2010 lawsuit by the U.S. September 2015 | The Self-Insurer

STEEP INTERFACE FEE HIKES | FEATURE Justice Department (DOJ) for anticompetitive practices involving provisions in agreements that raised hospital prices, discouraged discounts and prevented other insurers from entering the market. In addition, several small businesses and individuals earlier in the year won a $30 million settlement with Blue Cross Blue Shield of Michigan pertaining to a class-action lawsuit charging the insurer with violating antitrust laws by using most favored nation clauses in its contracts, according to a DOJ news release. Several BUCAs were either unavailable or declined to comment, including Blue Cross Blue Shield of Michigan and Independence Blue Cross. Another broker industry source who also asked not to be identified is aware of a few examples involving an interface fee of $4.50 and $5 PEPM, as well as a $5,000 flat fee combined with $1.50 PEPM charge. He cites Blues plans across the Carolinas as ones that have significantly raised their interface fees relative to others. With his cases averaging slightly less than 1,000 employees and as many as 65% using BUCAs as their ASO administrator, the concern is that those charges can quickly add up at a time when “most employers are very cost-sensitive and pricesensitive and looking for the best financial deal they can possibly put in place.” The business and ethical dilemma for self-insured employers is that the quality of the claims data that stop-loss carriers receive from good independent TPAs “is far superior to what they get from these BUCAs when they’re acting in an ASO capacity,” the source says, “yet the BUCAs are charging this fee, ostensibly because it’s a cost they’re going to have to incur to give access to those stop-loss carriers for this information or to do the connectivity with these stop-loss carriers. So, (a) they’re charging more money and (b) they’re really not delivering on behalf of the

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person paying them, the self-funded group. They’re really not providing a very good product.” ■ Bruce Shutan is a Los Angeles freelance writer who has closely covered the employee beneﬁts industry for more than 25 years.

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Cracking the Code – ICD-10 is Upon Us!

CD-9, the now ubiquitous method of categorizing disease and injury, was adopted in the United States in 1979 and has been the standard for decades. Every medical provider, health plan, insurance adjuster or claims processor encounters ICD-9 codes regularly, if not on a daily basis. All of that is about to change. On October 1, 2015, all HIPAA covered entities will be required to transition from ICD-9 to ICD-10 code sets, pursuant to 45 CFR 162.1002 (HIPAA defines covered entities as (1) health plans, (2) health care clearinghouses and (3) health care providers). Entities which are excluded from this classification and therefore will not be required to make the transition to ICD-10, include workers compensation insurance, automobile insurance (both liability and medical payments) and other excepted benefits, such as certain on-site medical clinics. Although these coverages and entities will not be required to use ICD-10 coding, they will necessarily need to work with providers, plans and other HIPAA covered entities which are required to make the transition, so there are clear incentives for anyone who deals with ICD-9 coding to make the transition to ICD-10, whether or not they are required to do so. These entities will also benefit from the increased specificity of ICD-10 and utilizing the same coding system as the medical providers and health plans with whom they will continue to need to work will avoid significant complications.

Written by Andrew Silverio 8

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Claims for services provided on or after October 1, 2015 (or for inpatient stays, with a date of discharge on or after that date), should be submitted with

ICD-10 codes, while claims for services provided prior to this date should be submitted with ICD-9 codes. The Medicare program has also announced that it will afford a 1 year grace period after October 1, 2015, during which claims won’t be denied simply because the ICD-10 codes submitted aren’t specific enough. This should not be mistaken for any grace period relating to the actual requirement to utilize ICD-10 codes; ICD-9 codes are not to be utilized by HIPAA covered entities after October 1, 2015 and claims submitted to Medicare which utilize ICD-9 codes will be denied.

ICD-10 coding provides for much greater detail and specificity regarding treatment than ICD-9 codes. ICD10 diagnostic codes have between 3 and 7 characters, with the first three indicating the category, the next three providing detail regarding the etiology, anatomical site and severity of the injury and the seventh and final providing information regarding the encounter (for example, “initial” or “subsequent encounter”). An ICD-9 code which indicates “broken leg” could have a corresponding ICD-10 code under the new system which indicates something like “full fracture of left femur, slip and fall.” Although CMS has provided tools to aid in conversion (www.cms. gov/Medicare/Coding/ICD10/2015ICD-10-CM-and-GEMs.html), there are many more ICD-10 codes than ICD-9 codes and the new coding provides for much greater specificity in describing diagnoses and treatment. This means that converting individual ICD-9 codes to ICD-10 codes accurately will be very difficult. When attempting to translate an ICD-9 code into ICD-10, there is a very significant possibility that unwanted and inaccurate medical information

can be introduced, simply because the ICD-10 coding system provides for so much more specificity. Take the example above of a code for a broken leg, for instance. Imagine an employee, Jane, slips and breaks her left femur at work. She is rushed to the hospital, undergoes emergency surgery and is expected to make a full recovery. When the hospital submits the bills to the employer’s workers compensation insurance, they do so using an ICD-10 code for “full fracture of left femur, slip and fall.” Workers compensation is still utilizing ICD-9 and translates the code as best they can, ending up with “broken leg”. All of the crucial, added information in the ICD-10 code is lost. Through an investigation, workers compensation determines that Jane had previously injured her right leg in a kayaking accident and the injury had healed abnormally, leaving her especially susceptible to re-injury. Workers compensation then denies the claim based on a lack of causation, where if they were using ICD-10, they would see that it wasn’t even the same leg. When entities communicating with each other use different coding systems, there is also an opportunity for the opposite problem: that unwanted (and inaccurate) medical information is introduced into a patient’s record.

What Happens to Claims That are Submitted with ICD-9 Codes After the Change-Over? This will depend on the language of the plan document and any applicable agreements, such as PPO contracts and how (and whether) they define a “Clean Claim”. HIPAA does not provide specific guidelines relating to claim processing, it merely

dictates which entities must utilize the new ICD-10 coding and when they must begin. Whether a plan can deny a claim pursuant to the plan document and/or PPO contract for improper coding and whether the plan can accept ICD-9 coding or require ICD10 coding pursuant to HIPAA, will be distinct and separate questions. For example, we examined a few plan documents for language which would impact this issue.

Sample 1: Providers and any

other person or entity accepting payment from the Plan or to whom a right to benefits has been assigned, in consideration of services rendered, payments and/or rights, agree to be bound by the terms of this Plan and agree to submit claims for reimbursement in strict accordance with their State’s health care practice acts, most recent edition of the ICD or CPT standards, Medicare guidelines, HCPCS standards or other standards approved by the Plan Administrator or insurer.

This plan document provides for the “most recent edition of the ICD or CPT standards”, so as soon as October 1, 2015 occurs, the plan can require providers to submit claims in ICD-10 format. Likewise, many plan documents do not explicitly require any specific format for claim submission and under these plan documents both forms of coding would likely be acceptable. For example, this document provides:

Sample 2: NonNetwork Claims It is suggested that each time you file a claim the following information is provided: Have all charges presented on an original itemized September 2015 | The Self-Insurer

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bill listing dates of service, type of service and the charge for each service as rendered, including the provider’s name, address, telephone number and tax identification number. Finally, other plan documents contain specific references to ICD-9, which may create conflicts relating to whether the plan may accept claims in this format after October 1, 2015:

Sample 3: Providers and any other person or entity accepting payment from the Plan, in consideration of such payments, agree to be bound by the terms of this Plan and agree to submit claims for reimbursement in strict accordance with their state’s health care practice acts, ICD-9 or CPT standards, Medicare guidelines, HCPCS standards, or other standards approved by the Plan Administrator or insurer. This plan document specifically mentions ICD-9 format. Granted, it uses “or” and mentions Medicare guidelines, which will require ICD-10, so under these terms both formats could be acceptable. Pursuant to the terms of this plan document, claims submitted in ICD-9 format are still payable, despite the fact that under applicable law after October 1, 2015, both provider and payer are required to utilize ICD-10. This highlights an important aspect of the ICD-10 transition: ensuring that plan language and PPO agreements reflect the change and do not create a situation where the plan administrator must choose between enforcing Plan terms and complying with Federal law. Preferred provider organization (“PPO”)/network agreements also usually contain language which will be impacted by the switch from ICD-9 to ICD-10 and cause problems for an entity which is required to make the transition but fails to do so. For example:

Sample 4: Claim Records and Reporting Requirements Company shall maintain appropriate records with respect to all payment determinations made with respect to Participating Provider claims for the duration of this Agreement and for seven ( 7 ) months thereafter. All Participating Provider claims shall be maintained in the original form or on electronic media. At [network]’s request, Company shall arrange to provide [network] with real-time and retrospective claims information in a mutually agreeable format... The claims information shall include, but not be limited to, patient and Subscriber identifier, claim number and check number, billed amount, allowed amount, paid amounts, payee (e.g. Member or Provider), billing codes, Provider name, Provider address, Provider TIN, date of service, date claim was received and date paid. While these agreements generally do not address specific coding formats, it is certainly plausible that a network would deem ICD-9 coding to not constitute “appropriate records” or a “mutually agreeable format”, particularly when dealing with a covered entity which is required by law to have made the change to ICD10. This is the kind of disconnect which won’t rear its head until some very large claims hang in the balance.

In addition to potential PPO network issues, failing to fully address the issues implicated by the ICD-10 change-over can have stop-loss repercussions. Stop-loss and reinsurance contracts almost invariably condition reimbursement on the underlying claims being payable under the terms of the plan. Likewise, stop-loss will reserve the right to make an independent evaluation of a claim’s payability and need not defer to the plan’s initial decision. When a plan pays claims submitted in ICD-9 contrary to either the terms of the plan or applicable law, or pays claims submitted in ICD-10 when the plan document requires ICD-9, stop-loss in either instance has a tempting and plausible basis to deny reimbursement and take the position that the claims should not have been paid by the plan. Any discrepancy between the plan document and either applicable law or plan procedures in practice creates an opportunity for stop-loss denials. This is an added incentive for plans to ensure their plan language conforms with applicable requirements.

Once Claims are Erroneously Processed Due to Inappropriate ICD Coding, a Payer’s Recourse is Very Limited It should be stressed that securing proper ICD-10 claim data is preferable to just converting codes. Because ICD10 provides for much more detailed claim information, only an estimated 5% of codes have exact matches between the two formats. Although there are companies that convert codes and have prepared conversion references (CMS has prepared GEMs, or “General Equivalency Mappings”, which are available at www.cms.gov/ Medicare/Coding/ICD10/2015-ICD10-CM-and-GEMs.html), approximating September 2015 | The Self-Insurer

an equivalent ICD-10 code from an ICD-9 code will inevitably lead to inadvertently subtracting or adding health and treatment information. To avoid claims processing errors and resulting overpayments, underpayments, or wrongful denials, plans should ensure their plan language aligns with current law and require that claims be submitted in the proper format. This is particularly true because if an overpayment is rendered due to the plan or TPA’s mistake, it is very difficult, or impossible, to secure refunds from providers, absent any wrongdoing or misrepresentation by the provider. Although there is no regulation to our knowledge prohibiting a payer from converting ICD-9 codes to ICD-10 codes in good faith, an argument that the provider’s submission of ICD-9 codes was wrongful or a “misrepresentation” will be weakened if the plan simply translates the codes and processes the claims rather than denying and requesting the correct format. Remember Jane and her broken leg? Imagine Jane’s employer didn’t provide any workers compensation coverage and her claims were instead submitted to her health plan. The provider submitted the claims in ICD-9 this time,indicating “broken leg”. The employer’s plan document has strong language, and they would have no problem denying the claims because ICD-9 was used instead of ICD-10. The plan doesn’t deny, though, instead opting to just convert the codes to ICD-10 and process the claims. They do the best they can and end up with a code for “full fracture of right femur, blunt force trauma.” The claims are paid, exceed the applicable specific deductible and are submitted to stop-loss for reimbursement. 12

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We all know where this is going. Stop-loss either: (1) looks at the ICD-10 code, discovers the kayaking accident and denies for third party liability, or (2) discovers the claims were submitted in ICD-9 and denies based on the fact that they should never have been processed in the first place. In either event, the plan is not being reimbursed and any argument they had against the provider for submitting ICD-9 coding was lost when they took it upon themselves to convert the coding and process the claims. All of this is just a brief glimpse at a few of the wrinkles which can and will come up when the healthcare world shuts the door on ICD-9, the system in use for almost 40 years. Starting on October 1, 2015, all HIPAA covered entities are required to utilize ICD-10 coding. This will include all medical providers and health plans, but not auto insurance coverage (either liability or first party/ medical payments coverage), excepted benefits (such as on-site clinics), or workers compensation. Workers compensation adjusters, auto insurance adjusters and attorneys will not be required by law to utilize or accept ICD-10 coding, as they are not “covered entities” under HIPAA’s Privacy Rule (http://privacyruleandresearch.nih.gov/pr_06.asp). In practice, however, these entities will eventually need to accommodate ICD-10 codes, as all medical providers and health plans will be utilizing the new coding format. Further, all entities will benefit from the additional data found in ICD-10 codes. Some delay in making the change is to be expected, however, particularly on the part of those not directly impacted by the switch. To be sure, there will likely be something of a transitional period where certain entities need to work with both coding systems. Plans, TPAs, vendors, stop-loss carriers, workers compensation and automobile insurance adjusters; all will regularly see both ICD-9 and ICD-10 codes for some time. To complicate things even more, in certain situations, such as where activities with a certain case or group of claims can span several months, one may expect to use both ICD-9 and ICD-10 coding on a single patient, course of treatment, or claim. And of course, the risk remains, however small, that certain non-covered entities continue to utilize only ICD-9 codes, requiring providers and other entities to have dual coding systems. Once the pieces are in place to actually make the change-over internally and utilize the new coding, the next step should be to engage a knowledgeable partner to ensure that plan documents and related agreements don’t create any pitfalls for your plans, as well as stand ready to meet unanticipated problems as they arise. For more information, contact Ron Peck, Esq. at ron.peck@phiagroup.com. ■ Andrew Silverio, Esq. joined The Phia Group, LLC as an attorney in the summer of 2014. In addition to conducting research into novel and developing areas of the industry, his primary focus is on subrogation and reimbursement and he handles many of the company’s more challenging and complex recovery cases. Andrew attended Berklee College of Music in Boston, earning his B.A. in professional music. He then attended Suffolk University Law School, graduating with an intellectual property concentration with distinction. There, he took the step into the healthcare realm of the legal world, serving ﬁrst as an editor and content contributor and then on the executive board of the Journal of Health and Biomedical Law. Andrew is licensed to practice in the Commonwealth of Massachusetts.

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September 2015 | The Self-Insurer

INSIDE

the Beltway Written by Dave Kirby

Congress Gets SIEF Brieﬁng on Self-Insurance; SIIA Responds to Rigid Stance on 831(b) Captives A continuing series of articles about SIIA’s federal government relations work on behalf of self-insurance.

obert Melillo, chairman of SIIA’s Health Care Committee, was the lead speaker at a Congressional brieﬁng on the importance of self-insured group health plans for private employers and unions that was sponsored by the Self-Insurance Educational Foundation, Inc. (SIEF).

The “Lunch and Learn” event was part of an ongoing series that SIEF presents to federal policymakers and their staff. Melillo, Head of Stop-Loss for Guardian Life Insurance Company, was joined in a panel that included Kathryn Bakich, Senior Vice President and National Health Compliance Practice Leader with Segal, an advocate for Taft-Hartley plans and trusts; and Katie Mahoney, Executive Director of Health Policy for the U.S. Chamber of Commerce. The panel addressed critical components of self-insured plans including why employers self-insure, how self-insured plans are structured to reduce costs and increase value and the legal and regulatory requirements applicable to self-insured health plans.

“As leaders in the self-funded marketplace, it is our obligation to work closely with both our state and federal legislators to ensure that all key stakeholders have a sound understanding and appreciation of the self-funding model as a means of financing a plan sponsor’s healthcare spending,” Melillo said. He noted that many in the audience were attuned to the subject, especially relative to the Affordable Care Act (ACA). “I think we were able to debunk some of the myths surrounding selfinsurance’s possible effect on the ACA and state health care exchanges.” Melillo noted three areas of clarification about self-insurance that the panel provided: • Group health plans will not tend to migrate to self-insurance on a large scale instead of their members joining the exchanges. Self-insurance is a rigorous process that brings its own financial and regulatory challenges and is not for everyone. • Groups that become self-insured are not liable to move back to the exchanges when claims become difficult to pay. The audience learned that sound selffunded programs with appropriate stop-loss insurance are designed to prevent that from happening.

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• Is self-insurance going to become an option for exchanges themselves? Melillo said, “We don’t know, but we sense that the market is trying to figure out if there is a role there for self-insurance.” The Self-Insurance Educational Foundation, Inc. (SIEF) is a 501(c) (3) non-profit organization affiliated with SIIA. Its mission is to raise the awareness and understanding of self-insurance among the business community, policy-makers, consumers, the news media and other interested parties. The Foundation’s website is www.siefonline.org.

Responding to JCT on 831(b) Captives

The federal government’s interest to more tightly regulate enterprise risk captives that elect the 831(b) tax code option was illustrated again when the Joint Committee on Taxation (JCT) of Congress proposed specifications that would be likely to smother the small business captive market. Among the proposed rules is a prohibition of 831(b) election where the captive is owned by a “family relation” other than the owner of the insured operating business. The result would be that only businesses where the same person owns both the business and the related captive could take the election. SIIA’s Enterprise Risk Captive (ERC) Advocacy Working Group and government relations staff drafted a point-by-point response to the JCT proposal that included several examples of captives that are properly-structured risk management plans but would be prohibited if the specification becomes law. At this time it is not clear whether the specification would be incorporated into a bill, or when such a bill may begin the legislative process. Earlier this year, SIIA joined with other elements of the captive industry

to agree to the prevention of captives that are formed for the purpose of estate planning from electing 831(b) status. But that industry position was apparently not considered in the current JCT proposed specification according to Jeff Simpson, chair of SIIA’s Alternative Risk Transfer (ART) Committee which includes the ERC group. He provides an illustration: “Imagine a small town with one road serving all the residents. If, suddenly, great big 18-wheel trucks started rumbling along that road the townspeople would likely complain. They might even ask that 18-wheelers be barred from using that road.

the great majority of small companies from using this risk management method while the major corporations would continue to benefit from using captives owned by their subsidiaries.” Simpson, an attorney with Gordon, Fournaris & Mammarella PA in Wilmington, Delaware, contends that the JCT specification is overly broad and would wipe out a major portion of the captive industry. Updates on this issue will be provided in real-time government relations bulletins and www.siia.org. ■

“But instead of eliminating the big trucks, this Congressional panel has opted to close the road to almost everyone. Of course, in this analogy, the small town is the ERC market, the road is 831(b) tax status and the 18-wheelers are the captives that are abusing the system for the sole purpose of estate planning. “But shutting off the 831(b) option to all but sole owners would prevent September 2015 | The Self-Insurer

OUTSIDE

the Beltway Written by Dave Kirby

SIIA Seeks Clariﬁcation of Connecticut’s New Rules Governing Stop-Loss Policies Continuing the series of reports on SIIA government-relations advocacy in state legislative-regulatory issues affecting self-insurance.

stringent set of 16 new rules to be observed by Connecticut stoploss insurance policies for employers sponsoring self-insured employee health plans arrived “out of the clear blue sky” according to SIIA member Brooks Goodison. SIIA requested clariﬁcation of the terse, bullet-point list of rules in a letter to the Connecticut insurance commissioner signed by SIIA Director of State Government Relations Adam Brackemyre. The state’s response had not been received by the deadline for this issue. The Connecticut Insurance Department’s bulletin of July 8, to become effective Sept. 1, stated, “stop-loss policies will not be approved if they contain provisions relating to the following:” • Claims denials that the employer is legally obligated to pay • Differences in attachment points based on the health status of enrollees • “Medical necessity” determination • “Usual or customary” determination

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• • • • • • • •

“Experimental/investigational” determinations Case management requirements Annual dollar limitations in coverage Mandated provider networks/benefit incentives for enrollees Requirements that enrollees be actively at work Right to examine enrollees Rescission for reasons other than fraud or intentional misrepresentation Early termination at the discretion of the carrier other than in accordance with cancellation and nonrenewal laws applicable to these policies • Terms or conditions that are misleading, deceptive or contrary to the public interest • Mid-term rate increases at the discretion of carrier • Any conflict with state law • Other provisions that are deemed to be health insurance and inappropriate for stop-loss The collective response by members of the self-insurance industry was “huh?” SIIA member Goodison, president of The Diversified Group TPA in Connecticut, was mystified about the motivation or origin of the Insurance Department bulletin, noting that it was issued without legislative action or apparently any input from the state’s insurance community.

“In the world of the ACA and other legislative/regulatory changes affecting our industry, confusion is not helpful or productive,” Goodison said. “We’ve never had a complaint from the state on any of these points. I don’t know whether these rules are based on actual instances or not.” With input from several SIIA members, Brackemyre’s letter to Connecticut Insurance Commissioner Katherine Wade requested clarification of the new set of rules and offered industry members who would be willing to meet with Insurance

“SIIA’s Government Relations staff is effective at consolidating information for accurate delivery to government organizations,” he said. “The information comes from the expertise of SIIA members of the Government Relations Committee who actually drive the conversation.” Updates on this issue will be provided through real-time government relations bulletins by email and on www.siia.org. ■

Department staff to resolve the many open questions.

Jay Ritchie, a SIIA board member and senior vice president of HCC Life, a medical stop-loss insurance company, observed that the Connecticut issue provided another opportunity for SIIA to take a leading role in advocating for the self-insurance industry.

The letter concluded with SIIA’s concerns about the timing of the bulletin and its effective date of Sept. 1: “As you know, many employers make health plan decisions in October or November for their January 1 renewals. This bulletin requires stop-loss carriers to resubmit approved forms by Sept 1. Some SIIA members are extremely

concerned that stop-loss policies may not be approved before they must be presented to the plan sponsor during an open enrollment discussion.”

September 2015 | The Self-Insurer

New Developments for Ongoing Issues in the RRG Sector

n the last year there has been a number of legal and regulatory actions in the risk retention group (RRG) insurance space. Last year, Ophthalmic Mutual Insurance Company (A RRG) (OMIC) led the campaign requesting that Wisconsin allow RRGs offering medical professional liability (MPL) to operate

in state after more than twenty years. This summer Wisconsin amended its laws to allow for MPL RRGs. Also in 2014, Allied Professionals Insurance Co., A Risk Retention Group saw favorable decisions handed down in three important court cases. In July, the RRG received a fourth court decision in their favor.

Wisconsin Opens to MPL RRGs As of July 14, 2105, the state of Wisconsin now allows risk retention groups to offer MPL coverage to physicians that practice in the state. RRGs providing medical professional liability have not been able to operate in the state since July 1990 when Section 655.23 of Wisconsin state law went into effect. The law was primarily a financial responsibility law that required healthcare providers to purchase medical professional insurance from Wisconsin admitted carriers and to participate in the stateâ&#x20AC;&#x2122;s Injured Family and Patient Compensation Fund. Non-admitted carriers of MPL, including RRGs, were unable to offer their Written by Karrie Hyatt 20

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products in the state.

The law was unsuccessfully challenged in court in the late 1990s by OMIC. OMIC is a Vermont-domiciled risk retention group that began operations in 1987 and is sponsored by the American Academy of Ophthalmology (AAO) to provide medical professional liability and other coverages to the association’s members. According to Paul Weber, vice president of Risk Management and Legal for OMIC, “We insure approximately 4,600 AAO members nationwide. We estimate there are about 10,000 ophthalmologists in private practice in the US, so we insure about 46%.” At this time there are about 160 AAO members in Wisconsin. Since the early 2000s, OMIC has been pursuing a more diplomatic approach to changing the Wisconsin statute and has been working with the Wisconsin Office of Commissioner of Insurance (OCI) to find a mutually agreeable solution. In 2012, OMIC was contacted by the leadership of the Wisconsin Academy of Ophthalmology and asked to seek legislative changes so that they could be insured by OMIC. OMIC later partnered with Preferred Physicians Medical Risk Retention Group (PPMRRG) to pursue a legislative correction. As stated in a previous article (August, 2014), Tim Padovese, CEO of OMIC said, “At this time, these avenues–ongoing discussions with OCI and legislation–seem like the best uses of our resources [rather] than trying to re-open litigation. In that regard, we are continuing to reach out to other MPL RRGs... and other captive insurance organizations that would be interested in this legislative/collaborative strategy rather than an adversarial approach.” OMIC and PPMRRG found their champion in Wisconsin State Representative John Nygren, who introduced legislation during the 2014 session to amend the earlier law and allow RRGs to operate in the state. Assembly Bill 808 and Senate Bill 609 were written to amend Section 655.23 of the Wisconsin statute to allow for risk retention groups to operate as any other admitted carrier providing MPL. While MPL RRGs would still be non-admitted carriers, the bills allowed for them to be treated as admitted carriers as long as they have registered with the insurance department and been approved to operate. Each bill received a hearing in 2014 just prior to the legislature being adjourned and was recommended for passage at that time.

In the intervening year, according to Weber, “OMIC and PPMRRG continued to work with Representative Nygren who was planning on making the change to the patient compensation fund statute during the 2015 legislative session.” “The language was included as part of [2015 budget modifications]. These modifications become part of the overall budget bill that comes out of the Joint Finance Committee and gets voted on in the Assembly and Senate,” continued Weber. “This year, there were about 70 modifications that were part of 2015 Wisconsin Act 55. Usually, these budget modifications have already been vetted by the Assembly/Senate, like ours were in the 2014 legislative session, so the leadership of the legislature wanted these to move forward.” 2015 Wisconsin Act 55 was passed and signed into law in July. OMIC has already begun to work with OCI in order to begin insuring Wisconsin ophthalmologists as early as January 2016.

Another Win for Allied Professionals In 2014, Allied Professionals Insurance Co., A Risk Retention Group, won three court cases that are already helping to support a risk retention group’s right to operate nationally under federal law. In July 2015, the RRG won another important

case in an effort to expand case law in favor of risk retention groups. Allied Professionals provides professional and general liability coverage to three risk purchasing groups whose members consist of alternative health practitioners, including chiropractors, acupuncturists and massage therapists. In 2014, according to the Risk Retention Group Directory and Guide published by the Risk Retention Reporter, Allied Professionals had $22.5 million in premiums and reported membership at 144,000. They have, by far, the largest number of members and policyholders of any RRG. The RRG, which began operations in 2003, has faced several disputes in different states when state laws are applied despite the preemptions of the 1986 Federal Liability Risk Retention Act (LRRA). In 2014, Allied Professionals won three cases in two appellate courts (New York and Florida) and one state supreme court (Nebraska).The cases all helped to set precedents regarding state direct action and non-arbitration statutes. The RRG decided to pursue court decisions in these cases because there has been little case law in regards to risk retention groups. Michael Schroeder, chairman of Allied Professionals Insurance Company, RRG, as stated in a previous article (January, 2015), said, “I felt like if we spent the money now and established [case law] then we wouldn’t have to spend the money later. In the long term, this would be more cost effective. As I’ve gotten more involved in the industry, I thought it would be a good step for the industry.” In the most recent decision, Courville v. Allied Professionals Insurance Company and Rathman, the Louisiana Court of Appeals held that the LRRA preempts Louisiana’s direct action statute. The plaintiff September 2015 | The Self-Insurer

in the case, Ronald Courville, sued his chiropractor, Thomas Rathmann and the chiropractor’s insurance company, Allied Professionals, under Louisiana’s direct action statute. Allied Professionals moved to compel arbitration under the Federal Arbitration Act (FAA). A state’s right to regulate insurance, as directed by the McCarran-Ferguson Act, means that it preempts the FAA. However, the LRRA, as designated by the original intent of Congress when it passed the act, is meant to preempt state regulation of risk retention groups. The Louisiana Court of Appeals decision was in favor of Allied Professionals. Specifically cited in the court’s decision was the 2nd Circuit Court of Appeals’ decision in Wadsworth v. Allied Professionals Insurance Co., A RRG and the Nebraska Supreme Court’s decision in Speece v. Allied Professionals

Insurance Company. Both cases that were decided in 2014. Schroeder attributes the RRG court wins in part to the support of the National Risk Retention Association (NRRA) which submitted Amicus Curiae, or friends of the court, briefs on behalf of the RRG. “NRRA was a very important part of this. When they file their friends of the court briefs, it affects the whole industry. It elevates how a judge or court of appeals will look at a case. The judges think, ‘now we know it’s important, we have the whole industry telling us it’s important.’”

direct action lawsuits] come up, judges will look at what the other courts did and will likely follow their rulings.” “I think that the legal precedent/ rule in this area is now pretty stable,” continued Schroeder, “I think that we will see far less litigation in this area.” ■ Karrie Hyatt is a freelance writer who has been involved in the captive industry for more than ten years. More information about her work can be found at: www.karriehyatt.com.

The RRG is not pursuing any new court action at this time. The case law that Allied Professionals has helped to set should go a long way in helping the RRG and all RRGs, when similar litigation may arise. Schroeder explained the new precedent is, “Not an absolute rule. But if [arbitration or

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Stop-Loss Captives Seen as Differentiator Editor’s Note: This is the third of a three-part monthly series leading up to SIIA’s national conference in October that is geared toward educating insurance brokers and advisers on alternative risk transfers involving captive insurance solutions. The aim is to address any concerns and misperceptions, as well as better prepare them to answer client inquiries about these arrangements, particularly in small and middle markets.

hen Bob Madden with Lawley Service Inc. ﬁrst presented stop-loss captives to fellow brokers at SIIA’s 2010 conference, the reaction was largely silent. But since then, he has noticed it’s piquing the interest of more brokers and stop-loss carriers. “There are not a lot of people doing this,” he explains. Offering this alternative funding mechanism paves the way for more consultative interaction with employer clients, whereas those who stick with traditional product sales are wedded to “products they can’t control,” says Jeff Fitzgerald, VP of employee benefits at Innovative Captive Strategies and a member of SIIA’s Alternative Risk Transfer (ART) Committee.

Written by Bruce Shutan 24

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While there are many different types of captives and complexity involved, he says stop-loss programs are much simpler to understand than people think. He likens them to a “well-run self-funded account for mid-market employers trying to figure out the best way to finance their health insurance exposure, as well as create

better risk and utilization profiles than they would have without it.” Another point he raises is that the vast majority of them work through carriers who pay claims “directly and quickly” without wading into esoteric territory. From a risk management standpoint, Fitzgerald describes these captives as “much more straightforward than, let’s say, a large, single parent captive that’s in a very specific niche, be it energy, finance, or construction with risks the regular market has trouble addressing and it’s a very big exposure to them.” Mike Madden, division senior vice president for Artex Risk Solutions, Inc. and no relation to Bob Madden, believes medical stop-loss captives offer brokers a better opportunity to distinguish themselves compared to P&C captives.

“The reason I say this for stoploss group captives is the first part of the definition, which is it’s a stop-loss program,” explains Madden, who’s also a member of SIIA’s ART Committee. Under most P&C captive programs, he says the group captive reinsures first-dollar policies wherein the captive is responsible for all claims. Under a stop-loss captive, he says there’s also a self-funded plan where the majority of claims activity takes plan and the plan is also an integral part of the employer’s compensation package. While the captive can help employers address claim drivers both below and above the employer’s stop-loss attachment, the stop loss is a separate component – and the primary focus of the captive. “There is now a self-funded plan that’s not attached to the stop loss that requires management and consultation and that’s where the broker can really shine,” he adds. Noting that the P&C captive marketplace is very mature with

roughly half of midsize employers using alternative risk transfer or captive programs for their risk management, Bob Madden says medical captives only started to catch on about five to 10 years ago. Brokers that don’t consider stoploss group captives for their clients may be missing an opportunity to strengthen their commitment to helping their clients manage risk, as well as elevate their own value by transitioning from pure placement to strategic partner, Mike Madden opines.

Elevating Risk Management Stop-loss group captives represent a solid long-term strategy for risk mitigation for midsize employers to drive down costs, deliver better costcontainment services and leverage plan utilization, according to Mike Madden. The strength of a group captive is that it collectively dampens volatility, he adds, noting that “if you’re not talking to your clients about this, somebody else is.” They give employers a better sense of where their medical and prescription drug dollars are going, as well as an ability to capitalize on investments made in employee wellness, population management tools, narrow networks, or other strategies, observes Gene Pompili, SVP

of sales at Roundstone and a member of SIIA’s ART Committee. Such captives offer a “smoothing mechanism” for small and midsize businesses that have historically been fully insured and subjected to significant volatility based on their size, he says. Through this arrangement, Pompili explains that they’re moved into a variable cost structure and allowed “to self-fund in a very secure and easy fashion compared to if they were on their own self-funding.” Bob Madden notes that “relatively small-sized groups may not have the courage, confidence, or understanding yet to take that leap to self-funding, but captives can be kind of a transitional step to be self-funded on your own.” A stop-loss captive expands access to programs, stability, transparency and accountability as part of a likeminded group of companies that they may not be able to achieve on their own through either the traditional fully insured or self-funded market, Fitzgerald says. Ideal candidates for a stop-loss captive are mid-market groups with broad enrollment demographics featuring a solid mix of singles and families. “We usually end up underwriting more to what they want to achieve and to their frustration than we do to actually the type of industry that they’re in,” he adds.

CLARIFICATION In the ﬁrst of our three-part series on captives, “Five Fast Facts about Captives for Brokers,” we outlined 10 programs, but neglected to mention that medical stop-loss, 831(b) and casualty group captives capture anywhere from 70% to 90% of the mid-market captive activity. This should help brokers who want to learn more about these arrangements sharpen their focus. In addition, the sections on ideal candidates for captives, red ﬂags and an exit strategy were heavily weighted toward 831(b) captives at the expense of others, while an explanation of the captive process inadvertently comingled 831(b) and separate captive and group captive risk-sharing silos. September 2015 | The Self-Insurer

Leaving the Comfort Zone But securing the necessary buy in may be a real challenge. Fitzgerald says selling customers on a stop-loss captive requires a “different mentality” in transitioning from short- to longterm thinking about managing medical claims and addressing employee behavior as part of a partnership approach with experts in this area. While brokers and agents may resist working with captive managers for fear that they will usurp their consultative role, he says “we’re there to accentuate and if we’re doing our job, then the broker is looking better than they would without us... Brokers are our best friends; they’re our source of business.” For small and midsize employer market segments on the fully insured side, Pompili points out that insurance

carriers are dictating the terms of broker compensation, whereas it’s a non-issue for brokers who work with a captive manager.

“All we ask is that a broker or an adviser tells us what they are currently making, whether it’s a commission or a fee and we build that into the price of the proposal,” he says. “So when done properly, it’s a cost-neutral scenario.” Bob Madden believes many brokers assume commissions aren’t built into captives or some captives may not use brokers. But “if they have a desire to learn about those programs, they can generate a tremendous amount of revenue and respect in the industry because people are going to come to them to learn how to do it,” he explains. Irrespective of whether 100 or 2,000 employees are involved, Mike Madden says “there’s a tendency for brokers to think of stop-loss almost as a commodity, so there ends up being a focus on premium dollars. The goal with a captive program is to change the mindset from ‘how do I manage stop-loss premiums’ to ‘how do I manage my overall health risk management program.’ So we are beginning to see a paradigm change.” A larger issue associated with broker commissions is that they’re not always transparent in either fully insured or self-funded markets. “Being part of the

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SIIA NATIONAL EDUCATIONAL CONFERENCE on STOP-LOSS CAPTIVES Stop-loss captive programs represent a growing market segment with significant business opportunities for employee benefit brokers and advisers, according to the description of an educational workshop at SIIA’s 35th Annual National Educational Conference & Expo on October 18-20th in Washington, D.C.

The session, “What Brokers Need to Know About StopLoss Captive Programs,” is one of three sessions on captives tailored to the broker community. An entire educational track on captives will feature eight of the conference’s 40 sessions at the world’s largest event focused exclusively on the self-insurance/ alternative risk transfer marketplace. Speakers will include Mike Ferguson, president and CEO of the Self-Insurance Institute of America, Inc., who will give opening remarks; Lee Davidson, VP of Berkley Accident & Health, LLC, who will be the moderator; Jeff Fitzgerald, VP of employee benefits for Innovative Captive Strategies; and Don McCully, principal of Medical Captive Underwriters.

consultative sales approach is that you are going to disclose what your fees are and nine-and-a-half times out of ten, your clients are not going to have a problem with it if you’re adding value,” Fitzgerald points out. He believes the stop-loss captive market will continue to evolve as it has before health care reform in spite of a regulatory movement at the state level to restrict the industry, comparing it with the tax code. “The reality of it is that I don’t know what the tax code is going to be 10 years from now, but I know there’s still going to be taxes,” he says. “I don’t know what the Affordable Care Act is going to state specifically 10 years from now, but I don’t think it’s going away and I know employers are going to need to address a way to finance their health insurance and ultimately to paying less claims in a manner that is stable and supportable. As long as employer groups are able to self-fund and address through wellness and clinical risk platforms the cost and amount of their claims, then stop-loss captives are going to be a niche part of that.” ■ Bruce Shutan is a Los Angeles freelance writer who has closely covered the employee beneﬁts industry for more than 25 years.

September 2015 | The Self-Insurer

PPACA, HIPAA and Federal Health Beneﬁt Mandates:

Practical

Q&A

The Cadillac Tax Part One: The Potential Impact of the Tax on Account-Based Plans (FSAs, HRAs and HSAs)

he so-called Cadillac Tax (Internal Revenue Code 4980I) was intended to provide a means to address overly rich employer-provided benefit plan designs as well as to provide a revenue source to finance other objectives of the ACA. The Cadillac Tax attempts to achieve this by imposing a nondeductible 40% excise tax on health benefit coverage provided for or arranged by an employer (even if paid for 100% by the employee) in excess of a statutorily determined amount. These amounts are initially set at $10,200 for single coverage and $27,500 for family coverage (with higher thresholds for certain hazardous occupations). While health care inflation (health care trend) has far outstripped general inflation, future increases in these thresholds are generally limited to the consumer price index (CPI). Indeed, the Congressional Budget Office (CBO) noted that:

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CBO and JCT expect that premiums for health insurance will tend to increase more rapidly than the threshold for determining liability for the high-premium excise tax, so the tax will affect an increasing share of coverage offered through employers and thus generate rising revenues. In response, many employers are expected to avoid the tax by holding premiums below the threshold, but the resulting shift in compensation from nontaxable insurance benefits to taxable wages and salaries would subject an increasing share of employees’ compensation to taxes. Those trends in exchange subsidies and in revenues related to the high premium excise tax will continue beyond 2025. The Cadillac Tax applies to taxable years beginning after December 31, 2017. In IRS Notice 2015-16, the IRS addressed (i) the definition of coverage subject to the tax (“applicable coverage”); (ii) how the cost of that coverage is determined; and (iii) the application of the statutory dollar limit to the cost of coverage. More recently, in Notice 2015-52, the IRS requested comments and provided further guidance as to who would be responsible for the Cadillac tax, how it was calculated and a special “smoothing” rule for account based plans (such as FSAs, HRAs and HSAs). The issues raised by these two Notices will be addressed in future articles. For now, we will focus on how the Cadillac Tax potentially impacts account based plans. The Code states that the coverage subject to the Cadillac Tax is “coverage under any group health plan made available to... [an] employee by an employer which is excludible from the employee’s gross income under section 106, or would be so excludible if it were employer-provided coverage (within the meaning of such section 106).1 ” In IRS Notice 2015-16, the IRS indicated that it was inclined to treat FSAs, HRAs and pre-tax HSAs as being subject to the Cadillac Tax. Thus, the following coverage would generally be subject to the tax: • Major medical coverage for actives AND retirees © Self-Insurers’ Publishing Corp. All rights reserved.

• Health FSAs • HRAs • Pre-tax HSA contributions (both employer and employee pre-tax salary reduction) • Onsite medical clinics • Wellness programs • Pre-tax funded hospital indemnity/specified disease coverage Certain types of coverage were specifically excluded from applicable coverage and certain excepted benefits described in Code §9832 are excluded from

applicable coverage as is dental and vision coverage under a separate policy, certificate, or contract of insurance. These exclusions include: • Fully insured Dental • Fully insured Vision, • Long-term care insurance and • After-tax funded hospital indemnity and/or specified disease coverage Notice 2015-16 states that the IRS is considering whether to exercise its regulatory authority to exclude EAP coverage and self-insured limited scope dental and vision coverage (that is considered excepted benefits under recently issued regulations under Code §9831) from the definition of applicable coverage. Notwithstanding the IRS’ indication that FSAs, HRAs and pre-tax HSAs should be treated as being subject to the Cadillac tax, we believe that strong policy and technical arguments can be made that an exception should apply for such arrangements. Consumer-directed benefit arrangements, including HRAs, FSAs and HSAs provide a means of financing healthcare costs incurred under health plans and particularly under high deductible health plans. Indeed, an important function of these account-based arrangements is to provide a ready source of funds to use for initial high cost expenses and enable employees (who might otherwise be forced into bankruptcy) an opportunity to amortize such costs throughout the calendar year. These accounts also provide a source of funds to provide coverage for benefits (e.g., dental, vision, wellness and otherwise) not covered under the high deductible or higher costsharing plans that employers may offer. Cadillac Tax regulations that sweep these consumer-directed healthcare arrangements into the calculation of September 2015 | The Self-Insurer

the tax will result in fewer employers offering the plans. This means that at a time when employees will be required to finance more of their healthcare costs under these higher deductible or high cost-sharing plans, employers will be less likely to offer the means of paying those costs through consumerdirected benefit arrangements due to the inclusion of the employer and employee contributions. The burden is particularly heavy for lower-paid employees; without these consumerdirected benefit arrangements, such employees will need to pay these amounts out of other take-home pay creating previously unforeseen economic hardship. In response to Notice 2015-16, advocates of consumer directed benefit arrangements have encouraged the IRS to exercise its discretionary authority to exclude the very arrangements that have served so well

to help curtail unnecessary health care spending. Arguments that have been made include the following:

I. The Guidance Should Clarify That Employer Contributions to an HSA are Not Included in the Cadillac Tax Determination Unless the HSA is a Group Health Plan Notice 2015-16 indicates that an employer’s contributions to an HSA are categorically included in the Cadillac Tax determination, in accordance with Code §4980I(d)(2)(C); however, neither the statute as a whole nor Code §4980I(d) (2)(C) supports this conclusion. The literal language of the statute and Code §4980I(d)(2)(C) only supports one of two conclusions with respect to an employer’s contributions to an HSA, both of which are limited in scope to

HSAs that qualify as group health plans. HSAs qualify as group health plans only to the extent that they fail to satisfy the safe harbor prescribed by the Department of Labor in FAB 2004-1 and 2006-2. The IRS clearly has statutory authority to clarify that employers need only include its contributions to an HSA that is a group health plan in its excess benefit determination.

What is Applicable Employersponsored Coverage? As a threshold matter, Code §4980I (a)(i) imposes an excise tax on the excess coverage benefit of only applicable employer sponsored coverage. It doesn’t impose an excise tax on applicable employer sponsored coverage plus other types of employer provided benefits that are not applicable employer sponsored coverage. Code §4980I(d) (1) describes applicable employer-

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sponsored coverage as coverage made available by an employer to an employee under a group health plan (except a group health plan that is specifically exempted) that is excluded from income under Code Section 106. Thus, there are two elements to the applicable employer sponsored coverage definition: (i) the coverage must be provided under a group health plan and the (ii) coverage must be excluded from income under Code §106. Code §4980I(f)(4) defines a group health plan for purposes of 4980I by reference to definition of group health plan in Code §5000. Code §5000 defines a group health plan as an arrangement that provides medical care that is “of or contributed to by the employer”.

Is an HSA Applicable Employersponsored Health Coverage? Although an employer’s contributions to an HSA are excluded from income tax under Code Section 106(d), HSAs are typically not considered “group health plans”, even where the employer contributes to them. HSAs, which are established and maintained primarily in accordance with Code §223 (not Code §5000), are tax-advantaged trust or custodial accounts established and maintained by individuals with a bank or approved non-bank trustee or custodian. Even if an employer contributes to an HSA, the HSA belongs to the individual – not the employer. Contributions may be made to an individual’s HSA on a pre-tax basis by the employer (including pre-tax salary reductions made through a cafeteria plan) or they may be made on a tax deductible basis by the accountholder or others on behalf of the accountholder. In all cases, the contributions to an individual’s HSA are non-forfeitable. If an employer makes contributions

to an employee’s HSA and the employee terminates, the employee is able to keep those contributions for future use. The individual accountholder dictates the manner in which the funds in the HSA will be used – not the employer who contributed to the HSA – and the funds in the HSA may be used for both medical and non-medical expenses. To date the IRS has not issued any formal guidance addressing whether an HSA is a “group health plan” under Code §5000; however, the tri-agencies, including the IRS, clearly indicated the following in the preamble to the regulations on prohibitions against lifetime and annual dollar limits:

Both MSAs and HSAs generally are not treated as group health plans because the amounts available under the plans are available for both 2 medical and nonmedical expenses. Notwithstanding the general treatment of HSAs (and MSAs), it is possible for HSAs to qualify as “group health plans”. The Department of Labor has issued guidance in both 2004 and 2006 describing situations in which an employer could cause the HSA to become a group plan subject to ERISA’s group plan requirements. For example, an HSA would qualify as a group health plan under ERISA if an employer exerted control over the investments offered through the HSA or the employer communicated the HSA to employees as an employee benefit plan maintained by the employer – just to name a few. Under no circumstances, however, does an HSA qualify as a group health plan under the DOL’s guidance solely because the employer made contributions to the HSA. In the preamble to the special enrollment regulations issued in 2006, the tri-agencies, including the IRS, noted that the special enrollment rules do not apply to HSAs unless and to the extent the HSA is a group plan under ERISA’s rules. Presumably, it would appear that the IRS would follow the DOL’s lead when making a determination whether an HSA is a group health plan. September 2015 | The Self-Insurer

Does the Language in §4980I (d)(2)(c) Extend the Definition of Applicable Employer-sponsored Coverage to HSAs that are Not Group Health Plans? Although Code §4980I(d)(2)(c) is awkwardly worded, there is no reasonable reading of it that would operate to extend the reach of the Cadillac Tax to contributions to HSAs that are NOT group health plans. Code §4980I(d)(2) identifies various methods for calculating the cost of applicable employer sponsored coverage, which we note above is limited to coverage under a group health plan. Code §4980I(d)(2)(c) specifically indicates the following with respect to coverage under an HSA or MSA:

In the case of applicable employer sponsored coverage [group health plan coverage] consisting of coverage under an arrangement under which the employer makes contributions described in subsection (b) or (d) of Section 106, the cost of the coverage shall be equal to the amount of the employer contributions under the arrangement. One interpretation of this rather unclear language is that this provision refers to coverage under a group health plan (e.g., an HDHP) that consists of employer

HSA contributions. The only way that the contributions to the HSA could be considered coverage under the group health plan is if the HSA were integrated into the group health plan, which would make the HSA a group arrangement under the DOL’s rules. The other reasonable interpretation of this provision, which we believe is the most appropriate interpretation, is that this language is referring to the portion of an HSA that is “applicable employer sponsored coverage” (i.e., a group health plan) that is attributable to an employer’s contributions and not any contributions made by the accountholder on an after-tax basis. In either case, Congress is clearly not referencing an HSA that is not a group health plan. Moreover, to conclude that Congress meant anything other than one of the two interpretations set forth above would completely change

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msl2221 - 09/15

Self-Insurance Institute of America, Inc.

35th Annual National

2015

CONFERENCE & EXP0 MARRIOTT MARQUIS // WASHINGTON, DC // OCTOBER 18-20, 2015

MARRIOTT MARQUIS // WASHINGTON, DC // OCTOBER 18-20, 2015 September 2015 | The Self-Insurer

the meaning of Code §4980I(a)(1), which limits the tax to the excess benefit of “applicable employer sponsored coverage”, which is coverage through a group health plan.

II. Salary Reduction Contributions to Consumer-directed Arrangements FSAs and HSAs Should not be Counted for Purposes of Determining the Cadillac Tax As noted above, a primary purpose of the Cadillac Tax is to slow the growth of healthcare costs by capping what was perceived to be overly generous health plans. To accomplish this, the Cadillac Tax operates to lower the value of employer-provided, tax-free health coverage, which appears to be intended to result in lesser but wiser

consumption of healthcare. However, the Cadillac Tax is poorly designed to achieve this purpose and will have many unintended consequences. One of these is that employers will be less inclined to utilize consumer directed arrangements (FSAs and HSAs) funded by salary reduction even though such arrangements have been effective in promoting more efficient utilization of healthcare dollars. While we understand that the IRS has traditionally treated salary reductions as an employer contribution, we believe that such treatment is inappropriate for the Cadillac Tax. Treating coverage under Health FSAs funded solely with pre-tax salary reductions as applicable employersponsored coverage will do nothing to help achieve the goals set by Congress when it drafted 4980I. As a result of the ACA, pre-tax salary reductions for Health FSAs are limited by statute

to $2,500 each year (adjusted for inflation). Thus, Health FSAs funded solely with pre-tax salary reductions are too limited in scope to contribute in any significant way toward the growth of healthcare costs and/or the financing of nationwide healthcare. Moreover, FSAs enable employees (especially lower wage employees) to better budget (and pay) for unanticipated spikes in healthcare expenses that might occur during the year. Consequently, we request the IRS to exercise its regulatory authority to exclude Health FSAs that are funded solely with pre-tax salary reduction contributions. We also note that there is some ambiguity as to whether “employer contributions” in this context should include salary reduction contributions made by employees to an HSA (assuming the HSA is a group health plan as discussed above). We recommend

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that HSA salary reduction contributions be excluded. This is evidenced by the specific reference made to such amounts in Code Section 4980I(d)(2)(B). Congress made a clear distinction between employer contributions and employee pre-tax salary reductions, which clearly indicates that Congress intended to treat them separately within the statutory framework of 4980I. Further, given the tax structure governing HSAs, if salary reduction HSA contributions are included in the Cadillac Tax contribution, employees may obtain a similar tax benefit by making the contributions directly the HSA on an after-tax basis and then deducting the contribution in accordance with section 223. This approach would be more cumbersome for employees and some employees might forgo the HSA contribution in this situation, leaving the employee potentially further exposed to medical expenses. We recommend that individuals should not be required to go through additional administrative hoops to obtain similar tax benefits and that salary reduction contributions to HSAs (assuming the HSA is a group health plan) should also be excluded from the tax. ■

The Affordable Care Act (ACA), 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 ACA, HIPAA and other federal benefit mandates. Attorneys John R. Hickman, Ashley Gillihan, Carolyn Smith, and Dan Taylor provide the answers in this column. Mr. Hickman is partner in charge of the Health Benefits Practice with Alston & Bird, LLP, an Atlanta, New York, Los Angeles, Charlotte and Washington, D.C. law firm. Ashley Gillihan, Carolyn Smith and Dan Taylor are members of the Health Benefits Practice. Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner’s situation. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of your situation. Readers are encouraged to send questions by email to Mr. Hickman at john.hickman@alston.com. References 1

Code §4980I(d)(1)(A)

Similar treatment has been accorded by other agencies for purposes of HIPAA Administrative Simpliﬁcation and COBRA

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Choosing the

Right

HOSPITAL

Helping Employees AVOID Potential Harm

ifteen years ago, the Institute of Medicine published a 223-page report called To Err is Human: Building a Safer Health System. The report alleged that up to 98,000 people die in hospitals every year due to preventable medical errors, which represents up to 4% of all deaths in the US. The result of this report was a national uproar from the public and the medical community and was featured on major news outlets including NBC, ABC, the New York Times, the Washington Post and USA Today; it is estimated that over 100 million Americans were exposed to coverage about the epidemic of medical errors.1

Written by Spencer Whipple and Benjamin Tabah 40

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CHOOSING the RIGHT HOSPITAL | FEATURE This led to numerous legislative changes and the creation of organizations (both public and private) focused on patient safety and quality of care, including: • the Healthcare Research and Quality Act of 1999 (which authorized the Agency for Healthcare Research and Quality, or AHRQ, as the lead agency); • the Leapfrog Group, officially launched in November 2000 (citing To Err is Human as a focal point for their founding)2; • the Patient Safety and Quality Improvement Act of 2005; • the AHRQ program Voluntary Reporting of Adverse Events; and • in 2004, the launch of the “100,000 Lives Campaign” by the Institute for Healthcare Improvement (IHI), with the goal to extend or save 100,000 lives from January 2005 through June 2006 by getting hospitals to adopt targeted best practices. This program was meant to be recurrent.

The problem was serious but optimism was high to fix the system and the IHI aptly summed up the spirit of the age: “Some Is Not a Number. Soon Is Not a Time. The number is 100,000. The time is NOW.” Fifteen years later, though important strides have been made and millions of private and tax dollars spent, the results are objectively underwhelming. In fact, some have suggested that the situation has actually gotten worse. At a minimum, it appears that initial projections of 98,000 deaths were not accurate. According to a 2013 study, the actual number is likely 2-4 times higher, representing 210,000 to 440,000 preventable deaths occurring in hospitals per year.3 Leah Binder,

President and CEO of the Leapfrog Group, captured the situation in this way:

“… Hospitals are killing off the equivalent of the entire population of Atlanta one year, Miami the next, then moving to Oakland and on and on.” 4 All told, Americans will have an average of 9.2 medical procedures in their lifetime and according to studies, in 25% of these procedures they will be harmed by medical errors.5 It is time to acknowledge that at best, the healthcare system as we know it is incapable of repairing itself; at worst, it has only a passive interest in doing so due to conflicting financial considerations. The fee-for-service structure has the potential to reward these types of medical errors, as hospitals charge for treatment required to manage the consequences of medical errors, something we see regularly at Global Excel Management (GEM). The future is not entirely bleak, however; as we shall see, many hospitals offer quality care at reasonable prices for specific conditions – the key is finding them.

How Hospitals Do Harm Hospital Overtreatment The US spends over 3 trillion dollars per year on healthcare and hospitals take 35% of that (or over 1 trillion dollars), representing the single largest source of spending. Many studies support that 30% ($300-$350 billion) or more of these funds are compensation for unnecessary and inefficient care.6

High quality facilities offer the right care at the right time; nothing more, nothing less. This results in better outcomes and lower costs. However, many facilities overuse key resources, which is both expensive and harmful. Diagnostic imaging such as MRI and CT scans, for example, are often used in a hospital setting but many, possibly up to a third, of these tests are not necessary. While some would say that it is better to be safe than sorry, the fact is that these tests expose patients to large doses of radiation and new studies have found that up to 29,000 deaths can be attributed to overexposure to radiation in the clinical setting.7 Another example is the overuse of blood tests on patients scheduled for heart surgery. A study from the Annals of Thoracic Surgery found that there was an average of 116 tests per patient and that many patients required transfusions to offset their blood losses. This in turn led to more post-operative infections, more time on a ventilator and more deaths.8 Diagnostic testing is big business for hospitals but unfortunately there are unintended consequences as it relates to patient safety. Patient-Centered Care Hospital systems are notorious for buying up new technologies and marketing the fact that the care they render is superior to that of the competition. However, not all technologies actually represent advancements in quality of care. Take, for example, robotic surgical technologies, which have great promise for certain types of surgery, but overall have not been proven to provide an additional benefit to most patients.9 This can be a concern as these large pieces of equipment, in the case of a patient “crashing” during surgery, can actually get in the way of a surgical team that needs to intervene. September 2015 | The Self-Insurer

CHOOSING the RIGHT HOSPITAL | FEATURE Furthermore, robotic surgical technologies are very expensive to purchase and maintain and lead to a surcharge on hospital bills. For certain procedures, it is estimated that these robotic technologies add an average of 11% to the total cost of the surgery, but rarely add a tangible benefit to the patient.10 GEM recently reviewed a claim where use of the Da Vinci Robot increased the billed charges by over $120,000 (in this case 70% of the total bill), with no supporting documentation demonstrating its necessity. Through discussions the provider wrote off all charges associated with the use of the robotic device. Not only do hospitals over-invest in some technologies, they can under-invest in new approaches or technologies that do have proven benefits for patients. For example, large and well-funded university-based hospitals are actually slower to adopt new methodologies as the teachers follow an “old guard” mindset, whereas smaller and lesser-known community hospitals can be much more progressive and eager to adopt new and improved methods.11 Hospital Errors Though certainly not intentional, many serious and preventable errors can occur in the hospital. The worst of such errors are called “never events”: • Foreign object retained after surgery (e.g. scalpels, sponges, retractors) • Air embolism • Pressure ulcers, Stage 3 and 4 • Trauma and falls • Collapsed lung due to medical treatment • Breathing failure after surgery

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• Postoperative PE/DVT (a deadly blood clot) • Wound split open post-surgery • Accidental cuts or tears linked to medical treatment Not all errors are so extreme. Other examples include postsurgical infections due to suboptimal cleanliness, or preventable readmissions (a.k.a. revolving door syndrome or “bouncebacks”) within 30 days of discharge due to poor communication, coordination of care, etc. Some hospitals, even after adjusting for severity, have twice the rate of readmissions as that of other similar hospitals.12 To make matters worse, a recently published article actually quantified that hospitals with higher rates of complications had higher profit margins as compared to hospitals with lower complication rates. In contrast, lower cost hospitals that are

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CHOOSING the RIGHT HOSPITAL | FEATURE less likely to over-utilize healthcare services had better quality than higher charging facilities.13 Hospital Quality Performance is Disease-Specific All hospitals must be licensed to provide care, which means that they meet the minimum safety guidelines and have the proper infrastructure to provide care. Many consumers assume this means a facility must also provide high quality care and this is simply not the case. The Joint Commission offers both hospital accreditations and disease-specific certifications. Whereas the former deal with the entire organization, the latter deal with establishing best practices for certain types of care for a specific disease. Hospitals may get a passing grade overall, but that doesn’t mean every department functions at a high level. For this reason, quality of care data is collected on a disease-specific basis so that high hospital performers can be duly recognized for their excellence in certain types of care.

Hospitals are required by the government to submit information on outcomes, which can be used to determine which hospitals are better at providing disease-specific care. Unfortunately this data is rarely considered or presented to consumers. Many consumers assume that if a hospital is “in-network”, it provides high quality care for their specific disease. However most, if not all, preferred provider organizations (PPOs) end their review of quality of care at the minimum hospital accreditation level, not assessing differences in patient outcomes of care on a disease-specific basis and they assign a percentage discount for the aggregate of all the services provided at the hospital. What if a facility’s quality for neurosurgery is high, but the quality on

orthopedics is very low? Why would one pay the same ‘discounted’ rate for both? And shouldn’t the patient be made aware of these stark differences in quality at a facility they are told is “in-network” and therefore high-quality? Is there another innetwork facility that could do better for the orthopedic procedure and possibly for less cost? Perhaps the best option for both cost and quality is out-of-network?

How Consumers Choose Hospitals: Looking for a Better Way As shown above, there is a lot of misinformation about hospital care, attitudes such as “more is better” or “the most expensive care is the best care.” This is simply not factual. And yet consideration for quality and efficient care (i.e. lower cost) in hospital selection is virtually non-existent in today’s market. Today’s consumers often choose the hospital based on physician recommendation, network status, the one with the most billboards, the easiest parking, the nicest lobby, the best reputation with friends and family, etc. In other words, consumers (and in most cases, physicians) do not consult hospital quality of care data.

Hospital Quality of Care Data Options There is a host of available resources to help determine a hospital’s quality for a variety of care types. Here are a few examples along with the data they consider for their findings: • The US News & World Report is derived from three measures weighted equally: hospital infrastructure, hospital reputation with subspecialists and 30-day mortality rates. • HealthGrades’ proprietary rating system predominantly uses mortality for most of their ratings, with select procedures assessed for post-surgical complications. • Leapfrog focuses primarily on structure, process and best practices for patient safety. September 2015 | The Self-Insurer

CHOOSING the RIGHT HOSPITAL | FEATURE • Comparion Medical Analytics considers mortality, complications, inpatient quality, core process, patient safety and patient satisfaction. Data is subdivided by clinical categories (such as cardiology, orthopedics, etc.) and adjusted for age and severity. But can this data be used to improve hospital selection and if so, what are the tangible benefits of doing so? Consider the following real example of a coronary bypass in an urban center in Illinois using a primary PPO:

Facility 1 (a university

hospital), rated at the 48th percentile of quality for DRG 234 (Comparion), charges on average $201,000 and the in-network rate is $129,000.

Facility rated at the 98th percentile in quality for DRG 234

(Comparion), charges on average $147,000 and the in-network rate is $89,000. By simply choosing Facility 2, the member receives higher quality services (and is more likely to avoid overutilization and harm) and the payer (an employer in this case) saves approximately $40,000 for this episode of care.

Arming Patients with Knowledge Patients want to know that they are receiving the best care available and at the lowest out of pocket expense for themselves. This is aligned with the goals of insurers and self-funded employers, who want to obtain affordable quality care for their members. The key is finding a bridge between this knowledge and the member

that allows them to make informed decisions about their healthcare and finances. With proper plan language and incentives, members can be engaged to choose high value care. By factoring costs, quality and discount information, substantial savings can be achieved for payers and patients through the strategic selection of high quality and lower cost facilities. Most importantly, the member may be spared from needless and expensive harm.

Conclusion Dr. Marty Makary, Surgical Director at Johns Hopkins and New York Times best-selling author of Unaccountable: What Hospitals Won’t Tell You and How Transparency Can Revolutionize Health Care, offers this suggestion: “Businesses may find it in their best interests to actively assist people to find the best medical care.”14 Employers can use cost-quality tools to help protect their

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employees in a tangible and realistic way while drastically reducing hospital costs. By educating employees and providing rewards to encourage usage (adoption is a critical component to these programs), employers can truly reform healthcare one admission at a time. ■ Spencer Whipple is Large Loss Specialist at Global Excel Management. He advises clients, including self-funded TPAs, stop loss carriers and international travel insurers, on cost containment strategy for catastrophic claims. Spencer works closely with GEM’s team of claims resolution specialists to align resources and approaches with clients’ needs on their most difﬁcult claims. Benjamin Tabah manages GEM’s Product Development and Marketing team. His focus on developing different approaches to cost management has led to a commitment to developing healthcare literacy tools designed to provide self-funded groups with the knowledge required to make informed decisions about their healthcare needs. References Susan Dentzer, Media Mistakes in Coverage of the Institute of Medicine’s Error Report, http://ecp.acponline.org/novdec00/ dentzer.htm, December 2000

Retrieved from www.leapfroggroup.org/about_leapfrog

3 John T. James, PhD. “A new, evidence-based estimate of patient harms associated with hospital care”, www.journalpatientsafety.com, Lippincott Williams & Wilkins, 2013 4 Leah Binder, “Stunning News on Preventable Deaths in Hospitals”, www.forbes.com/sites/leahbinder/2013/09/03/the-shocking-truth-about-medication-errors/, September 3, 2013 5 New England Journal of Medicine, “Temporal trends in rates of patient harm resulting from medical care”; 363, no. 22 (2010): 2124-34, as quoted in Marty Makary, Unaccountable: What Hospitals Won’t Tell You and How Transparency Can Revolutionize Health Care (Bloomsbury USA, 2013), introduction 6 Institute of Medicine, Transformation of Health System Needed to Improve Care and Reduce Cost, www.iom.edu/ Reports/2012/Best-Care-at-Lower-Cost-The-Path-to-Continuously-Learning-Health-Care-in-America/Press-Release.aspx, press release, September 6, 2012 7 Leana Wen, MD and Josh Kosowky, MD. When Doctors Don’t Listen: How to avoid misdiagnoses and unnecessary tests (St. Martin’s Press), January 2013, 81 8 The Annals of Thoracic Surgery, March Issue News Release, March 2015, as cited by Robert Preidt, “Do Heart Surgery Patients Get Too Many Blood Tests?” http://consumer.healthday.com/circulatory-system-information-7/blood-disorder-news-68/ do-heart-surgery-patients-get-too-many-blood-tests-696852.html, March 2, 2015. www.medicinenet.com/script/main/art. asp?articlekey=187195

This section is largely indebted to research from Makary, Unaccountable, chapter 12, “All American Robot”

Eva Kiesler, PhD. “Study Shows Robotic Surgery Holds No Major Advantages for Bladder Cancer Patients”, www.mskcc.org/blog/study-shows-robotic-surgery-holds-no-advantages-bladder-patients, July 24, 2014

Makary, Unaccountable, chapter 12

The Dartmouth Institute for Health Policy and Clinical Practice, “U.S. Hospitals, Facing New Medicare Penalties, Show Wide Room for Improvement at Reducing Readmission Rates”, www.dartmouthatlas.org/downloads/press/Post_Acute_Care_ Release_092811.pdf, September 28, 2011

Sunil Eappen, MD; Bennett H. Lane, MS; Barry Rosenberg, MD, MBA; Stuart A. Lipsitz, ScD; David Sadoff, BA; Dave Matheson, JD, MBA; William R. Berry, MD, MPA, MPH; Mark Lester, MD, MBA; Atul A. Gawande, MD, MPH. “Relationship Between Occurrence of Surgical Complications and Hospital Finances”, Journal of the American Medical Association (JAMA), April 17, 2013

Makary, Unaccountable, 77

September 2015 | The Self-Insurer

RRGs Report Financially Stable Results Through First Quarter 2015 This article originally appeared in “Analysis of Risk Retention Groups – First Quarter 2015”

review of the reported financial results of risk retention groups (RRGs) reveals insurers that continue to collectively provide specialized coverage to their insureds. Based on first quarter 2015 reported financial information, RRGs have a great deal of financial stability and remain committed to maintaining adequate capital to handle losses. It is important to note that ownership of RRGs is restricted to the policyholders of the RRG. This unique ownership structure required of RRGs may be a driving force in their strengthened capital position.

Balance Sheet Analysis

Written by Douglas A Powell Senior Financial Analyst DEMOTECH, INC. 48

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During the last five years, cash and invested assets, total admitted assets and policyholders’ surplus have increased at a faster rate than total liabilities. The level of policyholders’ surplus becomes increasingly important in times of difficult economic conditions by allowing an insurer to remain solvent when facing uncertain economic conditions. Since first quarter 2011, cash and invested assets increased 83.4% and total admitted assets increased 64.6%. More importantly, over a five year period

from first quarter 2011 through first quarter 2015, RRGs collectively increased policyholders’ surplus 64.7%. This increase represents the addition of nearly $1.9 billion to policyholders’ surplus. These reported results indicate that RRGs are adequately capitalized in aggregate and able to remain solvent if faced with adverse economic conditions or increased losses. Liquidity, as measured by liabilities to cash and invested assets, for first quarter 2015 was approximately 70.6%. A value less than 100% is considered favorable as it indicates that there was more than a dollar of net liquid assets for each dollar of total liabilities. This also indicates a slight decrease for RRGs collectively as liquidity was reported at 71.9% at first quarter 2014. This ratio has improved steadily each of the last five years. Loss and loss adjustment expense (LAE) reserves represent the total reserves for unpaid losses and LAE. This includes reserves for any incurred but not reported losses as well as supplemental reserves established by the company. The cash and invested assets to loss and LAE reserves ratio measures liquidity in terms of the carried reserves. The cash and invested assets to loss and LAE reserves ratio for first quarter 2015 was 223.3% and indicates a decrease over first quarter 2014, as this ratio was 243.7%. These results indicate that RRGs remain conservative in terms of liquidity. In evaluating individual RRGs, Demotech, Inc. prefers companies to report leverage of less than 300%. Leverage for all RRGs combined, as measured by total liabilities to policyholders’ surplus, for first quarter 2015 was 157.1% and was unchanged when compared to first quarter 2014. The loss and LAE reserves to policyholders’ surplus ratio for first quarter 2015 was 99.7% and indicates an increase compared to first quarter 2014, as this ratio was 89.7%. The higher the ratio of loss reserves to surplus, the more an insurer’s stability is dependent on having and maintaining reserve adequacy. Regarding RRGs collectively, the ratios pertaining to the balance sheet appear to be appropriate and conservative.

Premium Written Analysis

Since RRGs are restricted to liability coverage, they tend to insure medical providers, product manufacturers, law enforcement officials and contractors, as well as other professional industries. RRGs collectively reported over $1.4 billion of direct premium written (DPW) through first quarter 2015, an increase of 3.3% over first quarter 2014. RRGs reported $978 million of net premium written (NPW) through first quarter 2015, an increase of 45.2% over first quarter 2014. These increases are favorable and appear reasonable. The DPW to policyholders’ surplus ratio for RRGs collectively through first quarter 2015 was 120%, down from 134.4% at first quarter 2014. The NPW to policyholders’ surplus ratio for RRGs through first quarter 2015 was 82.2% and indicates an increase over 2014, as this ratio was 65.5%. Please note that these ratios have been adjusted to reflect projected annual DPW and NPW based on first quarter results. An insurer’s DPW to surplus ratio is indicative of its policyholders’ surplus leverage on a direct basis, without consideration for the effect of reinsurance. An insurer’s NPW to surplus ratio is indicative of its policyholders’ surplus leverage on a net basis. An insurer relying heavily on reinsurance will have a large disparity in these two ratios.

A DPW to surplus ratio in excess of 600% would subject an individual RRG to greater scrutiny during the financial review process. Likewise, a NPW to surplus ratio greater than 300% would subject an individual RRG to greater scrutiny. In certain cases, premium to surplus ratios in excess of those listed would be deemed appropriate if the RRG had demonstrated that a contributing factor to the higher ratio is relative improvement in rate adequacy. In regards to RRGs collectively, the ratios pertaining to premium written appear to be conservative.

Income Statement Analysis RRGs collectively reported a $42.8 million underwriting loss through first quarter 2015.The collective underwriting losses were offset by strong investment gains and other sources of income. RRGs reported an aggregate net investment gain of $74 million and a net income of $37.8 million. The loss ratio for RRGs collectively, as measured by losses and loss adjustment expenses incurred to net premiums earned, through first quarter 2015 was 83.1%, an increase over 2014, as the loss ratio was 81.8%. This ratio is a measure of an insurer’s underlying profitability on its book of business. The expense ratio, as measured by other underwriting expenses incurred to net premiums written, through first quarter 2015 was 11.5% and indicates a decrease compared to 2014, as the expense ratio was reported at 16.7%. This ratio measurers an insurer’s operational efficiency in underwriting its book of business. The combined ratio, loss ratio plus expense ratio, through first quarter 2015 was 94.6% and indicates a decrease compared to 2014, as the combined ratio was reported September 2015 | The Self-Insurer

The results of RRGs indicate that these specialty insurers continue to exhibit financial stability. It is important to note again that while RRGs have reported net income, they have also continued to maintain adequate loss reserves while increasing premium written year over year. RRGs continue to exhibit a great deal of financial stability. ■ Douglas A Powell is a Sr. Financial Analyst at Demotech, Inc. Email your questions or comments to dpowell@demotech.com. For more information about Demotech visit www.demotech.com.

at 98.5%. This ratio measures an insurer’s overall underwriting profitability. A combined ratio of less than 100% indicates an underwriting profit. Regarding RRGs collectively, the ratios pertaining to income statement analysis appear to be appropriate. Moreover, these ratios have remained fairly stable for each of the last five years and within a profitable range.

Conclusions Based on Financial Results Despite political and economic uncertainty, RRGs remain financially stable and continue to provide specialized coverage to their insureds. The financial ratios calculated based on year-end results of RRGs appear to be reasonable, keeping in mind that it is typical and expected that insurers’ financial ratios tend to fluctuate over time.

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Self-Insurers Should Heed New Cybersecurity Guidance Issued by NAIC

elf-insurers should heed the new cybersecurity guidance issued in April by the National Association of Insurance Commissioners. After a wave of publicity followed two breaches to hit health insurance companies, one of which affected 80 million customers, the Cybersecurity (EX) Task Force of the National Association of Insurance Commissioners (NAIC) adopted the Principles for Effective Cybersecurity Insurance Regulatory Guidance.

Written by Dan Bonnet 52

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If your company incurs a breach and it can be proved that your company did not heed the recommended guidance, there could be a case of negligence and a class-action lawsuit. While the guidance is not a legal requirement, if youâ&#x20AC;&#x2122;re providing health insurance to your employees, you are subject to the Health Insurance Portability and Accountability Act (HIPAA) requirements and must protect Protected Health Information (PHI). Noncompliance could result in civil and criminal penalties. As well as having PHI, your database probably also contains personally identifiable information (PII), such as a personâ&#x20AC;&#x2122;s full name, date of birth, address and Social Security numbers. Both PHI and PII are gold to cybercriminals who sell that data online in underground markets. Health information sells for about $50 per record where buyers buy PHI to enable fraudulent physician visits and surgeries. PHI and PII are used to open credit card accounts, apply for bank loans and create fraudulent passports.

To protect your network, the Principles for Effective Cybersecurity: Insurance Regulatory Guidance encourages insurers to secure data and maintain security with nationally recognized efforts like those embodied in the National Institute of Standards and Technology (NIST) framework. The NIST framework provides guidance on managing and reducing cybersecurity risk for organizations of all sizes, putting them in a much better position to identify and detect attacks, as well as to respond to them to minimize damage and impact. The NIST Framework consists of five functions, each divided into subcategories, as well as standards, guidelines and best practices. A security consultant who specializes in threats and cybersecurity can assess your network and help you secure your network using the NIST Framework and other standards. Whoever you work with should be familiar with common threats targeting the insurance industry, as well as the tactics, techniques and procedures attackers are using around the globe.

NIST Five Functions

One :

Identify your assets and risk so you can prioritize your security efforts. The first thing you’ll need to do is conduct a risk assessment to identify all your information assets, such as client lists, business strategies, marketing information and client data. Then rank each of them according to their values, from very low to very high, to help you focus on protecting the high-value data. You’ll also need to do a vulnerability assessment to see what systems and company Web-facing applications are weak. Your assessor can help you rank the likelihood and probability of a

IDENTIFY

threat exploiting certain vulnerabilities and can assess your internal and external network controls, policies and procedures, gaps compared to regulations and best practices.

Two:

Once you know your information PROTECT assets and their values, you can gauge your resources accordingly and decide what measures to take to protect them. Not only might you need security devices and software, you’ll need people to continually operate the devices. Many organizations erroneously believe that they can buy a security solution to protect their networks from intruders. However, all cybersecurity protective devices (firewalls, instruction protection/detection systems, unified threat management appliances and others) need to be consistently configured, managed and updated with the latest patches – as long as the update won’t harm the network. Once you buy a protective device, you need a human being for it to operate to its best ability. No matter what any security vendor says, all protective devices need consistent human interaction. There is no device that works automatically after plugging it into your network. Numerous breaches have occurred because people were not properly operating protective devices. When devices are not properly and consistently configured, hundreds of alerts go off and are ignored. Then the story becomes “The Boy Who Cried Wolf.”

Three:

Although you could have hundreds of preventive controls to prevent security incidents, some will still occur. That’s why it is important to be able to detect any anomalous activity as

DETECT

quickly as possible to get any attackers out as quickly as possible to prevent or lessen any damage. To spot attacks quickly, you need to monitor your network traffic and your endpoints (servers, workstations and laptops) 24 hours a day. It takes about 48 days for most organizations to recognize they’ve been breached, according to the 2013 survey report “Post Breach Boom” by the data security research center, Ponemon. However, when your network is continuously monitored, you can spot anomalous activity as soon as it occurs. In addition to monitoring your network, you also need to have detection systems on your endpoints (servers, laptops and workstations) that are also continuously being monitored. That allows you to see any anomalous activity on them so you can stop the attackers before they traverse the network.

Four:

The sooner you recognize you’ve RESPOND been breached, the sooner you can get the attackers to minimize the damage. The longer attackers are in your network, not only do you lose more and more data, it becomes more difficult and costly to get the attackers out. Getting attackers out of your network takes a lot of expertise that most organizations don’t have. Less than half of respondents to the Ponemon Post Breach survey said their organizations have the tools, personnel and funding to prevent, quickly detect and contain data breaches. While your organization can try to respond to a breach on its own, unless it has a full-time security team that works with threats day in and out conducting incident response engagements, has a global view of the threat landscape and is familiar with certain patterns attackers make in networks, it may not be able to remove the entire threat. If it removes

September 2015 | The Self-Insurer

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all but one trace of the threat, the attackers could still be hiding inside the network. To fully remove the threat, it often takes the expertise of a team that has handled hundreds of engagements and is familiar with the tools, techniques and procedures attackers use. The average time to resolve a cyberattack is 45 days, with an average cost to participating organizations of $1,593,627 during this 45day period, according to the 2014 Cost of Cybercrime Study: U.S. by Ponemon. That long time span and high cost can greatly be reduced if you understand the attackers and the ways they work. Professional incident response (IR) teams that conduct IR engagements full time could get attackers out in hours or days compared to weeks. Security companies offer IR retainer contracts that guarantee experts can be onsite within 24 hours to begin remediating a breach necessary and that you get discounted rates, usually saving you about $100 an hour. Without a retainer, it could take an organization a few days to select an IR team and for one to become available. The sooner you get the attackers out, the overall less cost. Results from the Ponemon 2013 Cost of Cybercrime Study: U.S. show a positive relationship between the time to contain an attack and organizational costs incurring from business disruption, data loss, recovery costs and legal costs. The total annualized cost of cyber crime in 2014 ranges from a low of $1.6 million to a high of $60.5 million.

information (PII), including addresses, dates of birth, Social Security numbers, health data and insurance policy information. They should ensure their computers are password protected so an intruder would be unable to access data on it. They should also use a private network at home and a virtual private network (VPN) whenever connecting to a public network. Using a public network at a coffee shop or restaurant makes one easy prey for attackers to snoop and see everything one is doing on the computer. Attackers on public networks can see all the sites people visit and everything they type on an online site, such as their login credentials. The right VPN will encrypt all traffic so even if attackers manage to snoop on a user’s online activity, all they would see would be intelligible gibberish. ■ Dan Bonnet, Director, Small and Medium Business – North America, Dell SecureWorks, has held several roles in technology consulting and business process optimization. He holds a Bachelor of Science degree from Georgia State University. Dell SecureWorks, a global information services security company, helps organizations of all sizes reduce risk, improve regulatory compliance and lower their IT security costs.

Five :

Recovering from an attack takes planning long before your network is breached. You should have a Business Continuity RECOVER Plan in place, as well as policies and plans in place to run your website and network from another offsite location. You should always keep hardware backups of your data each day. A security consultant can work with you to help you decide how much and what data needs to be backed up, as well as what critical systems and components are essential to your organization’s success. The recovery function helps you restore capabilities and services that were impaired. All these decisions need to be made before a crisis. Although independent agents probably won’t have a network to protect, at the very least they should take applicable steps to secure their computers. They need to ensure privacy of their prospects’ and clients’ personally identifiable September 2015 | The Self-Insurer

Section 4980D Excise Tax This article is intended for general informational purposes only. It is not intended as professional counsel and should not be used as such. This article is a high-level overview of regulations applicable to certain health plans. Please seek appropriate legal and/or professional counsel to obtain speciďŹ c advice with respect to the subject matter contained herein.

resently, many employers are understandably overwhelmed by Section 4980H Employer Shared Responsibility requirements under the Patient Protection and Affordable Care Act (PPACA) and are diligently working to ensure compliance this year. There is, however, another excise tax that many employers may have overlooked but need to be aware of when considering their compliance requirements and potential excise tax exposure: Internal Revenue Code 26 USC Â§4980D, which assesses an excise tax on employers for failure to meet certain group health plan requirements found under USC Chapter 100.

Written by Cori M. Cook, J.D. CMC CONSULTING, LLC 56

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Unlike 4980H, the 4980D excise tax is not limited to large employers. It is assessed against any employer, regardless of size, that is sponsoring a group health plan and fails to comply with the requirements under Chapter 100 of the Health Insurance Portability and Accountability Act (HIPAA). At this time, the only group health plans completely exempt from 4980D are those sponsored by the federal government. There is a carve out for small employers (2-50) who are offering

a fully insured product that fails to comply and there are also some penalty exceptions for church plans, however, it is important to remember that church plans are subject to 4980D. While applicable employers are just now seeing the potential enforcement and impact of the excise tax under 4980H, the Chapter 100 requirements for group health plans and the corresponding section 4980D excise tax for non-compliance have been around since 1996. The 4980D excise tax of $100 per affected individual, per day, is assessed against an employer for failure to comply during a non-compliance period (which begins the date the failure occurs and lasts until the date the failure is corrected) and, as you can imagine, can add up very quickly. The potential 4980D excise tax can greatly exceed the potential tax under 4980H and employers can be subject to excise taxes under both code sections. In addition, the Internal Revenue Service (IRS) also imposes a higher penalty, from $2,500.00 to $15,000.00, for those employers that have failed to self-report and receive a notice of examination. Chapter 100 group health plan requirements have since been amended by PPACA and now include, but are not necessarily limited to the following: • Providing coverage of adult children until age 26; • Prohibiting rescission of coverage (unless caused by fraud or intentional misrepresentation); • Prohibiting annual or lifetime dollar limits; • Prohibiting pre-existing condition exclusions; • Prohibiting a waiting period in excess of 90 days; • Prohibiting health related discrimination; • Providing preventative care coverage; • Providing patient protections - allowing patients to select their primary care provider or pediatrician from any available participating provider; • Prohibiting preauthorization referral requirements for obstetrical, gynecological and emergency services; • Requiring that out-of-network emergency care be adjudicated in accordance with in-network benefit terms; • Requiring plans to have a claims appeals process including internal appeals and external review processes; • Providing for non-discrimination; • Providing women’s preventative care services in network (some exceptions are available for religious employers);

• Providing coverage for approved clinical trials; • Requiring compliance with maximum deductible limits and out-of-pocket maximums; • Prohibiting discrimination against a provider acting within the scope of license when service is covered under the plan; and • Providing for multiple notification requirements for participants regarding plan amendments, patient protections, claims appeals procedures and a Summary of Benefits and Coverage (SBC). Until 2009, there had never been a method for self-reporting the excise tax under section 4980D and the IRS had not historically imposed these excise taxes as part of an audit. However, with the implementation of the PPACA market

reforms, enforcement of this section was necessary to ensure compliance. Form 8928 was created by the IRS shortly before PPACA was signed into law as a way for employers to selfreport their 4980D violations. Section 4980D does limit exposure for unintentional violations by reducing and/or eliminating the excise tax in certain circumstances including: 1) a correction with 30 days; 2) if the employer failed to discover the violation but did exercise reasonable diligence; and 3) if no willful negligence occurred on the part of the employer, capping the tax at a certain amount depending on how large the employer is. It is important to note that the excise tax assessed by 4980D is limited to compliance with Chapter 100 requirements and does not apply to violations of other areas of HIPAA privacy, security or electronic data interchange rules, or the breach notification requirements of the Health Information Technology for Economic and Clinical Health Act (HITECH). PPACA’s most significant amendments to the Chapter 100 requirements include a prohibition on annual or lifetime dollar limits and a requirement to provide preventative care to participants without cost sharing. This posed a problem for those employers who chose not to offer group health plans and instead created arrangements to pay or reimburse an employee’s premiums for major medical coverage purchased in the individual market. In 2013, the IRS released Notice 2013-54, which gave guidance to employers regarding 4980D and included information regarding “Employer Payment Plans” (EPPs). It stated that pre-tax payment or reimbursement arrangements (e.g., HRAs) for employee’s individual market premiums are considered group health plans subject to the September 2015 | The Self-Insurer

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market reforms and that they do not comply with the dollar limit or preventative care requirements under Chapter 100. Employers who maintained standalone HRAs for their employees questioned this rationale, claiming the individual policies their employees obtained satisfied market reforms; thus, the excise tax should not apply to them. However, the Notice addressed this issue, stating that an HRA must be integrated with primary health care coverage provided by the employer to be considered in compliance with section 4980D.

It is important to remember that PPACA’s market reforms generally do not apply to those group health plan’s that have “fewer than two participants who are current employees on the first day of the plan year.” Therefore, while HRAs are considered group health plans for the purposes of Section 4980D, an exception may exist for a standalone retiree-only HRA. Fortunately, in March of 2015, the IRS released Notice 2015-17, which provides clarification and transition relief for employers with EPPs. Specifically, for those smaller employers not subject to the requirements of 4980H, no penalty would be assessed before June 30, 2015, giving them time to remedy their 4980D violations without having to complete Form 8928 and pay the penalty for non-compliance. However, unfortunately, this period has since passed. Employers need to be sure their group health plan is in compliance with Chapter 100 requirements.

excise tax. A distinction from 4980H, where only one plan being offered to full-time employees and their dependents needs to satisfy the requirements of 4980H to avoid the potential excise tax. Yet another opportunity for TPAs to educate their clients and assist them in ensuring compliance. It is also important for TPAs to make sure their Administrative Service Agreements address the respective responsibilities and liabilities with regard to 4980D and 4980H and the potential excise taxes arising therefrom. ■ Cori M. Cook, J.D., is the founder of CMC Consulting, LLC, a boutique consulting and legal practice focused on providing specialized advisory and legal services to TPAs, employers, carriers, brokers, attorneys, associations and providers, specializing in health care, PPACA, HIPAA, ERISA, employment and regulatory matters. Cori may be reached at (406) 647-3715, by email at cori@corimcook.com or at www.corimcook.com.

It is important to remember that under 4980D, the requirements are imposed on each plan individually. Each group health plan offered by an employer must satisfy the requirements set forth in Chapter 100, as amended, or the employer may be subject to the $100 per day, per affected individual, September 2015 | The Self-Insurer

SIIA Endeavors Opportunity is Knocking at the 2015 Annual National Education Conference & Expo

he SIIA Annual National Conference & Expo is the world’s largest event focused exclusively on the self-insurance/alternative risk transfer marketplace, typically attracting more than 1,700 attendees from throughout the United States and from a growing number of countries around the world. If self-insurance is important to you in any way, this is simply a mustattend event, so join us at the Marriott Marquis in Washington, DC October 18-20th. The program features more than 40 educational sessions designed to help employers and their business partners identify and maximize the value of selfinsurance solutions. Sessions are broken down into focused tracks, including General Sessions, Alternative Risk Transfer, Health Care, Workers’ Compensation, International and new this year, the CEO/CFO/Owner Educational Track. The CEO/CFO/Owner Educational track features two sessions focused on future opportunities for your company. Over the last several years, an increasing number of private equity and venture capital firms have been making significant investments in third party administrators, on-site clinics, technology firms and other companies involved in the self-insurance marketplace. So what can we expect going forward from an industry perspective and what do individual companies need to know in order to position themselves to attract equity investors? These and related questions/ topics will be addressed in “The Rise of Private Equity and Venture Capital in the Self-Insurance Marketplace.” Orlo “Spike” Dietrich, Managing Director of Ansley Capital Group will moderate a panel of leading private investment and venture capital firms active in the self-insurance marketplace, including Steve Cosler, Operating Partner at Water Street Healthcare Partners, Marty Felsenthal, Partner, HLM Venture Partners, Ryan Kelley, Partner, Shore Capital Partners, LLC and Paul Wallace, Managing Director of The Heritage Group. You and your employers are “head down” working every day to grow your company and provide great value to your clients. At some point, however, a different opportunity will knock on your door. A financial investor or a strategic buyer will come calling. You will see a great acquisition opportunity that could dramatically accelerate your growth. Perhaps a round of growth capital could allow you to enter new markets. The question will be: Are you ready? The early preparation and details will make all the difference. Corporate structure, accounting strategy (cash vs. accrual), organizational structure,

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secession plan, employment agreements, board composition, technology protection; the list is very long. Orlo “Spike” Dietrich, Managing Director of Ansley Capital Group, LLC and Jeff Allred, Partner, Nelson Mullins Riley & Scarborough will take you through a number of considerations and scenarios that will help prepare you for that inevitable time when all the preparation pays off in both time and the valuation of your company in “Your Company and Its Future – Preparing for a Major Financial Transaction.” This new track, along with the rest of the educational program, will be supplemented with quality networking events, including an exhibit hall with more than 150 companies showcasing a wide variety of innovative products and services designed specifically for self-insured entities. If you are searching for a selfinsurance business partner, they will be waiting for you at this event. For more information on this can’t miss event, including hotel information, sessions, exposure opportunities, registration and more, please visit www.siia.org. See you in Washington! ■

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LifeBenefi Insurance Companyproducts of New York Offiin ce:the Woodbury, Administration Office: MN). Within(Home the State New York, onlyOffi ReliaStar Life Insurance VoyaReliaStar Employee ts insurance and(Home services U.S. are NY. provided by ReliaStar LifeMinneapolis, Insurance Company andofAdministration ce: Minneapolis, MN) and Company of New York is admitted, and its products are members of the Voya® family of Minneapolis, companies. Voya Benefi ts of is aNew division bothReliaStar companies. ReliaStar Life Insurance Company of New York (Homeissued. Office:Both Woodbury, NY. Administration Office: MN).Employee Within the State York,ofonly Life Insurance Product availability and specific provisions may vary by state. Company of New York is admitted, and its products issued. Both are members of the Voya® family of companies. Voya Employee Benefits is a division of both companies. Product availability and specifi c provisions vary by state. ©2015 Voya Services Company. All rightsmay reserved. CN-0615-14780-0616 172717 07/01/2015

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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

2015 Board of Directors CHAIRMAN OF THE BOARD* Donald K. Drelich Chairman & CEO D.W. Van Dyke & Co. Wilton, CT CHAIRMAN ELECT* Steven J. Link Executive Vice President Midwest Employers Casualty Co. Chesterﬁeld, MO PRESIDENT* Mike Ferguson SIIA Simpsonville, SC TREASURER & CORPORATE SECRETARY* Ronald K. Dewsnup President & General Manager Allegiance Beneﬁt Plan Management, Inc. Missoula, MT

Directors Andrew Cavenagh President Pareto Captive Services, LLC Philadelphia, PA Robert A. Clemente CEO Specialty Care Management, LLC Bridgewater, NJ Duke Niedringhaus Vice President J.W. Terrill, Inc. Chesterﬁeld, MO

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Jay Ritchie Senior Vice President HCC Life Insurance Company Kennesaw, GA Adam Russo Chief Executive Ofﬁcer The Phia Group, LLC Braintree, MA

Committee Chairs ART COMMITTEE Jeffrey K. Simpson Attorney Gordon, Fournaris & Mammarella, PA Wilmington, DE GOVERNMENT RELATIONS COMMITTEE Jerry Castelloe Castelloe Partners, LLC Charlotte, NC HEALTH CARE COMMITTEE Robert J. Melillo 2nd VP & Head of Stop Loss Guardian Life Insurance Company Meriden, CT INTERNATIONAL COMMITTEE Robert Repke President Global Medical Conexions, Inc. Novato, CA WORKERS’ COMP COMMITTEE Stu Thompson Fund Manager The Builders Group Eagan, MN *Also serves as Director

SIIA New Members Regular Members Company Name/ Voting Representative

Dave Meguschar ADVANTAGE Health Solutions Inc. Indianapolis, IN Eric Evans, Vice President Beneﬁt Assistance Corporation Ripley, WV Christopher Fey, Chairman & CEO Big Bang Health Inc. Bentonville, AR Patrick Downey, Exec. Vice President Downey Public Risk Kokomo, IN Shomari Scott, Marketing Director Health City Cayman Islands Grand Cayman Cayman Islands Robert Barker, Member Kentucky Captive Association Inc. Louisville, KY

Employee Members Patrick Downey Executive Vice President Indiana Public Employer’s Plan, Inc. Kokomo, IN Karl Ladegast, Administrator Kentucky Associated General Contractors Self-Insurers’ Fund Louisville, KY David Snowball Director of Captive Utah Captive Insurance Dept. Salt Lake City, UT

Afﬁliate Members Robert Vogel, President Pro Group Captive Management Services Inc. Carson City, NV

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