Employer-Sponsored

Health Care Plans

Are Challenged

By Carlton Harker, FSA, MAAA

Written for www.self-fundhealth.com

Introduction

The Challenges

Self-Funding Responses

References

Introduction

The reader will find two basic themes in this article:

1. If employer-financed health care is to be saved from the current challenges which it faces, it will be self-funding, accorded its broadest definition, that will save it.
2. To repel the enemies at the gate, self-funding must modify some of its practices particularly in risk management.

The Challenges

Introduction

The most significant challenges to employer-financed health care plans are as follows:

• Increasingly-aggressive federal mandates
• Continuing burdens of health care cost inflation
• New provider force-the Rx companies
• Nation’s changing demographics and ethos
• Political pressures from pro-single payer blocs
• Litigious legal environment.

Increasingly Aggressive Federal Mandates

Amendments to ERISA have expanded benefits (pregnancy, Medicare coordination, discrimination, COBRA, e.g.) as well as modified plan administration (claims, confidentiality, EDI, e.g.).

Such seemingly endless federal-mandates may soon cause a crisis resulting in some or all of the following:

• Employers will drop plans or replace them with a defined contribution model.
• Employers will adopt fully insured plans regardless of the cost.
• Private, employer-sponsored plans will disappear.

ERISA was intended to correct abuses with pensions, but the solutions only succeeded in replacing pensions with 401(k) plans. This will likely be deja vu for health care plans.

Continuing Burdens of Health Care Inflation

We have progressed through the first generation of cost containment (second opinions, precertification e.g.). This was akin to picking up the ripe fruit from the ground.

The second generation, while effective, also muddied the waters:

• Most wellness or behavioral programs were predicated on the carrot and not the stick; this logic detracted from their effectiveness.

• The so-called high-low or in-network/out-of-network type of benefit design to a great extent aided and abetted all types of antiselection against the plans and by all types of parties thereto. Included in these programs is the entire panoply of letter-house solutions (PPO, EPO, e.g.).

• Aggressive utilization review influence has had a useful role in many TPA-administered plans. However, the same forces which have diminished the effectiveness of HMOs will also diminish the effectiveness of the UR firms.

• Capitation-funded HMOs are suffering from legal, public relations and financial challenges. The potential Federal Patients’ Bill of Rights legislation on the horizon. The medicine to cure the HMO abuses may harm the non-HMO, employer-Sponsored plans.

The third generations of cost containment should directly confront one of the basic truth of out health care dilemma. That is, well over 50% of our health care cost are for either (a) conditions brought about by out own actions or (b) known chronic conditions which are not properly and prudently care for by plan beneficiaries. This third generation of cost containment has been acknowledged but largely untried.

New Provider Force – The Rx Companies

While contributions of the Rx companies to medicine must, doubtless, be recognized, they are excessively-dominant in their influence over both the cost and the manner of practicing medicine. Consider their (a) arcane pricing methodologies, (b) influence on the market by direct advertising and associated gimmickry, (c) alleged and proven restraint of trade practices, (d) direct influence as to method of practicing medicine, (e) practice of increasing a drug’s efficacy by 5% and its price by 60%, e.g. and (f) philosophy that all solutions and cures come with their pills.

Nations Changing Demographics and Ethos

Consider the following outline:

1. Economic Considerations

a. Younger people will tend to wish benefits of an income-protecting nature; will be more positive about the use of Rx as the expected answer to all medical problems; will have a strong sense of entitlement to health care as a right and not a privilege; and will wish personal empowerment and control over plan benefits.

b. Impact of global economics on corporate practices is a factor; globalists want a single payer federal plan.

c. Character of the economy has changed from being creator/maker to a user/consumer.

2. Demographics

a. The philosophy of the older population (now called the baby boomers) is phasing out and the philosophy of the younger population is phasing in.

b. The near universality of the two-income family makes the female employee a critical consideration.

c. Our increasing urbanization makes environmental health issues more important and makes quality care (in the inner cities, e.g.), more difficult to provide.

Political Pressure from pro-Single Payer Blocs

The concern of many thoughtful people is that the continuing burdens on employer-financed plans will finally break the camel's back.

Many powerful forces wish this breaking to be earlier rather than later.

Examples:

· Globalists and internationalists.

· Those who believe that all solutions originate in Washington, DC.

· Millions of providers, uninsured, etc. who have been casualties in the breaking down of our health care financing mechanism.

When the political blocs, above-described, gain the ascendancy, a federalized single-payer plan will be voted in. The federal single-payer model is being held at bay by other national priorities (terrorism, e.g.), wait/see attitude on defined contribution plans, residual and strong national fondness of our present health care system and the established role of employers in health care distribution system that even the big government advocates are hesitant to disturb.

Litigious Legal Environment

The purpose of ERISA and other laws impacting employer-sponsored health care plans is to attempt to bring about changes without opening the flood-gates of litigation. The writer asserts that the changes are here but the floodgates and open (if not wide at least not merely ajar). The plethora of disputes is apparently without end and requires industry recognition and resolution for correction.

Modifications to Self-Funding

Introduction

The modification to self-funding are needed in these areas:

• Plan amendments
• New employer economic paradigm
• Stop-loss practices
• New TPA practices and services
• Miscellaneous.

Plan Amendments

1. Rx is an Elective Benefit

Because the use of Rx is such a personal matter, no person who is anti-Rx should be forced to pay the Rx cost of those who are pro-Rx. With the Rx costs so large a percent of the total health care bill, the anti-Rx participants may be forced to forgo needed basic coverage because they cannot afford to pay the large costs laid upon the plan by the pro-Rx participants.

2. Coordination of Eligibility (COE)

Examples of COE provisions are as follows:

a. No person may be covered by this plan and by comparable employer

sponsored plan at the same time.

b. No dependent may be covered by this plan who is also eligible to be covered by another comparable employer-sponsored plan.

c. No dependent spouse may be covered by this plan whose income exceeds that of the participant of this plan.

3. Demand Management (Using Stick, Not Carrot Disciplines)

a. Demand management deals with either deleterious personal habits (behavior changing) or serious chronic health conditions (disease management).

b. In order to keep demand management as close to the claims processing function as possible, and, also, to promote single-stop service, demand management

4. Bifurcated Plan Design

Each year at renewal, plans should offer the participant the choice between these two options:

a. Defined Contribution

For income-protecting purposes: involves Health Savings Accounts.

b. Defined Benefit

For asset protecting purposes; this is the traditional health care plan.

5. Funding Equity

Both attained aged and geographic are should be factors in determining participant contributions plan funding factors and COBRA premiums. The age-sloping must not be so steep as to violate ADEA guides, however.

6. Subrogation

Expand subrogation provision in two ways: (a) provide for recoveries in specified instances (medical errors, which are matters of public record, e.g.) where there is no tortfeasor and also (b) provide for recoveries arising from the disgorgement payments made by the Rx companies because of anti-trust settlements.

7. Medical Directive (Living Will)

If actuarial-certified for ADA-parity purposes, a $1,000,000 lifetime maximum for a person with a living will and a $200,000 maximum for a person without such a living will is perfectly proper.

8. Retirees

a. Early retirees (those under age 65 primarily) should be classed as COBRAs with extended benefits. The COBRA 18-month is a minimum extension period. Risk pool simplicity and the avoidance of the AICPA FAS 106 liability are two primary advantages.

b. For the working aged, the plan might be amended to increase the hours for eligibility to, say, 37-1/2. Those workers, who elect reduced hours and thereby fail to meet plan qualifying hours, are not on the plan, but do continue working albeit on modified terms (i.e., shorter hours).

9. Benefits as an Unwanted Attraction

However, logical a benefit design may appear, if benefits are too attractive (or contributions too small), they will be a lightening rod to persons with health problems. Employees will change jobs for health care benefits. Tenured benefits should be considered. The lifetime maximum, e.g., should be limited to, say, $200,000 during the first six months of plan coverage for any covered person.

New Employer Economic Paradigm

The essential attitudes or practices of the employer, under the new economic paradigm are as follows:

· Offering good benefits, in lieu of good pay, has become economically questionable; there are less costly ways to attract and retain personnel now that health plan costs are so high.

· Pay, benefits, time-loss, workers' compensation and productivity should be unified and monitored as a package for each worker.

· Multi-stop service, if not rigidly coordinated will often be a reason for mishaps.

· The employer must expect a zero tolerance to any liability. For the employer to burden itself with the plan obligations and risk the farm in the process, is simply not reasonable.

Stop-Loss Practices

Certain stop-loss practices might be modified.

1. Aggregate stop-loss might be replaced by block treaty reinsurance with all (or nearly all) of the TPA's book of self-funded plans covered under such treaty. By pooling and other modifications, it is the intent that (a) aggregate stop-loss will not be used as an arena for vendors and employers to compete and (b) claim gaming will be eliminated or significantly reduced.

2. Since there is no body of common law applicable to stop-loss, the stop-loss agreement should have expanded and/or clarifying language added to make up for such absence of common law. Areas where expanded language are needed, include the following:

· Broadened definition of clerical or ministerial errors.

· Greater specificity as to how the 50% and shocker notices are to be submitted.

3. The TPA should not have mere ministerial duties in filing and reporting, but rather should be under a joint contractual obligation to both the stop-loss carrier and the employer. The agreement should be explicit in requiring all of the parties thereto to give the highest level of good faith and fair dealing to each other.

4. The stop-loss agreement should make the disclosure statement part of such agreement and setforth in considerable detail how errors therein will affect the coverage. Both the TPA and the employer are jointly bound to give the carrier what it requests in a fair and good faith manner.

New TPA Practices and Services

New practices and services of the TPA which should be considered are as follows:

a. The TPA might wish to eventually assume some or all of the plan administrator's responsibility and becomes the plan fiduciary. To protect such TPA from liability, these modifications are needed:

• Micromanaged plan document should be used.
• UR function should be directly accountable to the TPA as regards any or all E & O exposure. The UR firm is hired (arm's length) by the TPA but the UR firm stands on its own as regards E & O.
• Stop-loss will be specific-only with the claim denial likelihood as near to zero as possible. Aggregate stop-loss is discussed under stop-loss practices.

b. TPAs, as a matter of sound business sense and for survival reasons, as well, should consider using consortiums as a way of meeting the increasing demands on them. At some point, the enormous burdens on the small TPA, may simply become too heavy. Consortiums may be helpful to the

TPA in a multitude of ways. Two examples follow:

· Administration

Jointly-shared systems, etc., and shared master trusts (for defined contribution plans) are two examples.

· Marketing

Self-funded life insurance through VEBA associations and small group MEWA look-alikes (claims experience is not commingled) are two new marketing ideas to be developed.

Avoiding Litigation

One simple rule which should be followed by all employer-sponsored health care plans so as to minimize litigation is this: avoid conflicted interests. This rule would not only minimize litigation but it would make dispute resolution much easier to resolve. An example of ongoing conflicted interest is where the claims adjudicator and the provider of stop-loss are the same entity (even if under different names as with controlled corporations). Such instances are common with ASO arrangements.

Another simple rule is for all plan-related documents to set forth with detailed specificity how disputes should be resolved by the available alternate methods. That is, a paragraph devoted thereto should be replaced by a page (or even more).

References

Articles to amplify or justify some of the views set forth in this page may be found in www.self-fundhealth.com

· Expanded Role of MGU with Self-Funded Health Care Plans

· Health Savings Accounts

· MGU-Managed Self-Funded Plan

· Retiree benefits and Self-Funded Health Care Plans

· Risk Management Guide to Self-Funded Health Care Plans

· Self-Funded Long Term Disability

· Stop-loss Suggested changes.