CAPTIVES:

An Ideal Place for All Types of Stop Loss

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Dan H. Carlson

Marsh USA Inc. - Managing Director

Gary J. Bischel

Guy Carpenter - Managing Director

Jay B. Waters

University Hospitals - VP-Corporate Risk Management 2

DISCUSSION OUTLINE

“Setting the Table” Dan H. Carlson

Marsh

“Hands-On” Experiences

- Provider Excess Loss Insurance & Employer Stop Loss Captives - University Hospitals, OH Employer Stop Loss Captive Program

Summary / Questions Gary J. Bischel

Guy Carpenter

Jay B. Waters

University Hospitals 3

“SETTING THE TABLE“

Stop Loss “101“ Healthcare Reform – Evolving Risk Industry Trends / Dynamics Large Medical Claims Dan H. Carlson

Marsh USA Inc. - Managing Director 4

STOP LOSS...a

loosely

used term

•

Employer Stop Loss (ESL)

• For employers with a self-funded (ASO) employee benefit plan •

Provider Stop Loss Insurance (PSL) Provider Excess Loss Insurance (PEL) Provider Excess Insurance (PEI)

• For “at-risk” healthcare providers that are accepting risk through capitation, bundled payments, or global payments, plus ACOs) •

Health Plan (HMO) Reinsurance

• For reinsuring a health plan’s large catastrophic medical claims of covered members 5

“STOP LOSS” Typical Coverage

Retention (Deductible)

(annual per person) $100,000 - $1M or higher

Coinsurance Payable

(after the retention)

Covered Services

90% or 80%

Reimbursement Level Maximum Benefit Other

Global, specific services (i.e. hospital-inpatient, outpatient, professional, pharmacy, etc.) Contracted amount or amount paid $1M, $2M, $3M, $5M, $10M, or Unlimited Membership size/type, utilization data, provider contracts, and claims experience 6

TYPES OF PATIENT “POPULATIONS”

• • • •

Commercial

» Individual Products • Including Health Insurance Co-Ops » Employee Benefit Plans (Group Insurance) Products • Health Plan or Health Maintenance Organization (HMO) • • • • Point-of-Service (POS) Preferred Provider Organizations (PPO) Accountable Care Organizations (ACOs) Administrative Services Only (ASO) with Employer Stop Loss (ESL)

Medicare Medicaid

(AFDC/TANF, ABD, SSI, etc.)

“Dual Eligibles”

(Medicare and Medicaid) 7

HEALTHCARE REFORM

Evolving Risk… •

Commercial Health Plans

– No pre-existing conditions underwriting – Phasing in of no annual & lifetime maximums – Covering children to age 26 – Medical Loss Ratio (MLR) pressures 8

HEALTHCARE REFORM

Evolving Risk… •

Medicare / Medicare Advantage

– Formation of Accountable Care Organizations (ACOs) – CMS Shared-Savings Risk Pools – Reduced reimbursements – Patient Centered Medical Homes (PCMH) & Medical Neighborhoods 9

HEALTHCARE REFORM

Evolving Risk… •

Medicaid Health Plans

– Expanded geographies / eligibility – Dealing with significant covered population increases - Network & Administrative Adequacy Challenges !!

– Long term funding given State and Federal budget constraints 10

INDUSTRY DYNAMICS / TRENDS

Provider Contracting • ACO-Type Contracts for Commercial Populations • Accountable Care Organizations (ACOs) – Specific Provider Excess Loss Insurance – Aggregate Provider Excess Loss Insurance for “Pioneer” ACOs • Bundled Payments (hip & knee replacements) • Provider Direct Contracting with Employers • Risk-Taking Specialty Providers (Cancer Treatment) • Health Insurance Exchanges – Including New Health Co-Ops – BEWARE: New and Unknown Patient Populations 11

LARGE MEDICAL CLAIM TRENDS

Beware… • Continued concern over increasing

FREQUENCY

of catastrophic claims and

SEVERITY

- Neonates - Hepatitis C - ESRD - Biotech cancer drugs - Hemophiliacs (blood factor) - Organ transplants / re-transplantations • Some carrier and client loss ratios are deteriorating.

• Healthcare providers are attempting to negotiate higher reimbursements from health plans • THE RESULT: Increase in risk and the potential for market-driven increasing reinsurance premiums 12

STEPS LEADING TO THE CAPTIVE OPTION

Premium Funding Continuum • •

Fully Insured with Experience Refund

Monthly per member per month (PMPM) premium payment • •

Premium Funding Alternatives

(cash flow advantages) Retro-Claims Corridor » Shared claims risk with insurer – the “middle” layer • Other » “Aggregating Specific” and “Inner-Aggregate” •

Use of Captive

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CARRIER MARKET DYNAMICS

GOOD NEWS

• Carriers are preparing for the formation of new risk-bearing entities such as ACOs, and the migration from fee-for-service to value based “at-risk” revenue compensation models. • They are more receptive to new types of risk opportunities.

• New carrier entrance • “Direct writers” are considering expanded distribution strategies • Adding staff 14

CARRIER MARKET DYNAMICS

Is it time to consider placing this coverage in your captive?

BAD NEWS

• Carriers are fine-tuning their risk appetite. • Carriers have more selective distribution strategies (limiting insurance broker access).

• “Seasoned” underwriters are aware of your historical purchasing practices.

• Administration margins can be up to 40%!

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“Hands On“ Experience

Provider Excess Loss & Employer Stop Loss Captives

Gary J. Bischel

Guy Carpenter - Managing Director 16

Captive Stop Loss Programs

Motivated by Historical Frustration • Trading dollars with their stop loss carrier and consistently finding themselves on the losing end • Being restricted by provisions within the filed insurance products available to them • Lacking “linkage” between finance, care management, human resources, etc.

• Struggling to find ways to effectively increase utilization of their captive 17

Captive Stop Loss Programs

Common Objectives Create a risk management scheme which provides: • The ability to reap the benefits of their own success in managing claims • A mechanism for which to manage the desired amount of retained exposure while at the same time controlling the reinsurance markets • A reduction of frictional costs (premium tax, carrier loads, etc.) of risk transfer • Introduction of uncorrelated, short-tail, 1 st party exposures which are complimentary to the captive’s portfolio.

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Captive Stop Loss Programs

Important Considerations The ability to properly analyze the subject risk to: • Quantify its volatility • Create an optimal coverage scheme • Determine appropriate captive funding levels • Dictate pricing/terms to the reinsurance markets Coordination of resources to satisfy numerous interested parties • Regulatory authorities • Captive Boards Commitment across multiple organizations to the short term effort and long term success of the program 19

Captive Stop Loss Programs

Consistent Results • Reduced hard dollar “all in” cost • Significant (25%+) reduction in premium spend to external (re)insurer • Potential for significant surplus contribution to captive • Improved financial results (i.e. lower net cost of reinsurance) across continuum of loss scenarios • Upside-only exposure for captive • Risk corridor is often fully funded • Potential to earn a positive investment return on those premiums 20

“Hands-On” Experience

Employer Stop Loss Captive Program

Jay B. Waters

University Hospitals - VP-Corporate Risk Management 21

UNIVERSITY HOSPITALS

Historical Information • Self-Funded Employee Medical Benefit Program • 25,000 Lives • Third Party Administrative Services • $500K per Claim Retention • Employer Stop Loss Provided by Administrator • Nominal Premium • $2M per Claim Excess of Retention / No Aggregate • No Exposure to Employer over $2.5M Lifetime Maximum • Excluded Pharmaceuticals • Recovered 80% of UH Costs 22

UNIVERSITY HOSPITALS

Historical Information • 2011 Formed Accountable Care Organization • Covers All Employees • 2011 Healthcare Reform Eliminates Lifetime Maximum • Financial Exposure Excess of $2.5M

• Selected New Administrator • Employer Stop Loss Coverage Not Offered • Cost of Commercial Stop Loss Coverage Doubles • Captive Asked to Evaluate Providing Coverage 23

UNIVERSITY HOSPITALS

Evaluation – Claims History • Actuarial / Consultant Review (Loss Cost Funding) • Internal Claims Analysis (2009 Year ~ 1 Claim for $2.4M) • Overall Favorable Loss Experience

University Hospitals Claims History

Year Aggregate Claim Value Trended (000) 2007 2008 2009 2010 2011 Average $0 $977,000 $3,167,000 $233,000 $100,000 $895,400 $50,000 $2,287,000 $3,854,000 $448,000 $148,000 $1,357,400 24

UNIVERSITY HOSPITALS

Evaluation (Continued) • State of Employee Health • Accountable Care Organization » Wellness Programs ~ Improving Employee Health » Oversight of Claims by UH Nurse Case Managers • Anticipated Improvements in Frequency and Severity • Pricing • Actuarial / Consultant Review » Estimated Premium • Broker Quotations » Commercial Insurer Quotations 25

UNIVERSITY HOSPITALS

Captive Program • $3M Annual Aggregate • $500K Retention • 15 / 12 Contract Term • 100% Recovery of UH Costs • Pharmaceuticals Included • Commercially Comparable Coverage and Premium 26

UNIVERSITY HOSPITALS

Captive Program Results • Significant Improvement in Recovery • Policy Surplus Year Total Claims Including Pharmaceuticals

University Hospitals Recovery History

Claims Excess Retention Recovery Under Captive Recovery Under Commercial Coverage @ 80% Annual Premium 2012 2013 $6,327,722 $9,911,786 $615,257 $963,720 $615,257 $963,720 $0 $0 $1,500,000 $1,000,000 27

UNIVERSITY HOSPITALS

Captive Program - 2 New Policies Written in 2014 - 31,000 Lives in 2014 28

SUMMARY

•

Understand your organization’s risk tolerance

•

Know the risk that your captive will assume

•

Engage leaders across the organization to ensure visibility, buy-in, and ultimately success

• •

Monitor the changing external healthcare environment Care management is critical

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