© 2018 HOLMES MURPHY & ASSOCIATES
HEALTH INSURANCE 201 –
MANAGING COSTS
HOLMES MURPHY
2019
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© 2018 HOLMES MURPHY & ASSOCIATES
FULLY INSURED
VS.
SELF FUNDED
BASICS OF INSURANCE
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WHAT IS INSURANCE??
Transfer of risk
• Exposures are pooled for greater predictability
Law of large numbers:
• The greater the number exposures
• Less variation in loss pattern
• More predictable losses
Cost of insurance is function of:
• Expected losses (paid claims and required reserves)
• Administrative costs (billing, claims, customer service, overhead)
• Required statutory payments (assessments, premium taxes)
• Predictability of loss (risk charges)
• Distribution costs (sales commissions)
• Profit
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BENEFIT FUNDING METHODS
Benefits are typically financed one of three ways
• Insured
• Partially-insured
• Self-funded
Health care
benefits
Life Insurance
AD&D
Disability:
Short-term
Long-term
Insured Self-Insured Minimum
Premium
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CONTINUUM OF RISK
Amount of Risk
Assumed by Insurers
Amount of Risk
Assumed by Employer
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ASSUMPTION OF
RISK
The employer does not pay
premiums; instead, it pays fixed
costs (administrative fees and
stop-loss premiums) and
variable costs (employee health
care claims).
PAYMENTS PAYMENTS
PLAN DESIGN
COMPLIANCE
The employer pays
monthly premiums to an
insurance carrier.
The employer assumes the
risk.
The insurance company
assumes the risk.
Employers have more
control and freedom in
their plan designs.
Employers are more
limited by insurers’ plan
design options.
The plan must follow any
ACA/Federal guidelines
but does not follow state
regulations.
The plan must comply with
state regulations.
SELF - INSURED PLANS FULLY - INSURED PLANS
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FUNDING ARRANGEMENT DETAILS ITEM FULLY-INSURED SELF-INSURED
Summary and Key
Advantages
A “winner take all” arrangement with
premiums being set in advance based on
expected future incurred claims and
expenses. Provides full insurance protection
and budgetable cash flow with no deficit
carry forward
Claims are funded by the client as
benefits are paid. The client pays the
administrator a fee for administrative
services. Client will hold their own claim
reserve
Benefit Plan Designs Plans must be filed with each state based on
state mandates
Fully-customizable; avoids state
mandates
Risk Retention Insurance company Client
(up to stop loss limits)
Claim Funding and
Variability Insurance company; client pays predictable
monthly premium
Client
(insurance company may fund SL claims)
Funds Claims After
Termination Insurance company
Post-termination cash liability applies;
terminal liability stop loss can extend the
contract coverage period after plan year
end.
State Premium Taxes Yes, taxes apply No
(except on SL premium)
HIPAA Insurance company must comply Must name a privacy offer and
comply with HIPAA
Impact of Savings Savings are reaped by the insurance
company
Savings directly reduce overall benefit
costs
Fiduciary Responsibility Insurance company has final claim
determination and liability
Employer has final claim determination
and liability
Billing Administration Monthly consolidated premium invoice Weekly claim wires
Monthly stop loss & admin fee invoices
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FULLY INSURED – THE DETAILS
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HOW PREMIUMS ARE
DEVELOPED Large groups (over 100 lives):
• A blend of your medical and pharmacy claims experience and the insurance
companies manual rates
• Adjustments are made to reflect any changes or anticipated changes in:
• Demographics
• Plan design
• Delivery system
• Utilization patterns
• Exposure units
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HOW PREMIUMS ARE
DEVELOPED Small groups (under 100 lives):
• Rates based upon claims experience of pool or community and insurer’s desired
retention (expenses)
• Not based upon claims experience of any individual policyholder
• Insurance company bears entire risk (either wins or loses)
• Can result in policyholder paying premiums higher than actual costs, a typical
example would be paying community rates to HMOs in a dual choice
environment
• Very little flexibility in plan design, administration, pricing, etc.
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© 2018 HOLMES MURPHY & ASSOCIATES
FULLY-INSURED PREMIUM
COMPONENTS
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%Expected Paid Claims
Reserve
Expenses/Retention
Pooling Charge
Margin
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© 2018 HOLMES MURPHY & ASSOCIATES
HOW PREMIUM DOLLARS
ARE USED
2%
5%
5%
3%
70%
15% 2%
2%1%
85%
10%
Small Group Large Group
Commissions Claims
Risk Charge Administration
Premium Taxes Profit
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© 2018 HOLMES MURPHY & ASSOCIATES
2/1/17 - 1/31/18 2/1/16 - 1/31/17 Manual Rate*
Total Paid Claims $2,427,706
Pooling at $175,000 (exclude claims above) -$19,292
Net Paid $2,408,414
Average Covered Employees 270
Avg Per Employee Per Month $748.83
Annual Trend 9.5%
Trend Months to Effective Date mid-pt 21
Trend Factor 1.166
Pooling Expenses @$175k 1.080
2018 -19 Expected Claims PEPM $943.19 $844.04
Experience Weight 75% 25%
Blended Expected $785.03
Credibility 38.5%
Blended Projected Claims
Retention - Expenses (17%)
Projected 2018 - 19 Claims + Retention - PEPM
State Premium Taxes
ACA Fees
Needed Premium 2018 - 19 - PEPM
Current Premium
Projected Needed Increase as of today
* Prior year projected and Manaul rate from last renewal adjusted for trend
$0.17
$1,076.15
$867.90
24.0%
$918.40
61.5%
$867.05
$177.59
$1,044.64
$31.34
FULLY INSURED
RENEWAL WORK-UP
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MINIMUM PREMIUM
Self Funded with training wheels
• Hybrid of both fully insured and self-funded
• Employer pays a minimum monthly premium
• Insurance company sets a claims attachment point
• Employer pays all claims under the attachment point (cash flow
advantage of self-funded)
• Claims over the attachment point are paid by the insurance
company
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SELF-FUNDED (ASO)
• Employer retains risk up to a certain point
• Often uses stop loss insurance to limit financial exposure:
• Aggregate - limits loss of aggregate claims to a predetermined
level
• Specific - limits loss on any individual claim to a predetermined
level
• Employer is responsible for paying all claims up to the
stop loss level
• Employer pays an administrative fee to a third party for
administration and access to managed care networks,
medical management, etc.
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SELF FUNDED RATE
DEVELOPMENT
Current Fees PEPM Annual % Increase Projected Fees PEPM Annual
Medical Admin $20.00 $85,000 3.0% Medical Admin $20.60 $88,000
Utlization $3.37 $14,000 3.0% Utlization $3.47 $15,000
Rx Admin $3.35 $14,000 0.0% Rx Admin $3.35 $14,000
Caféteria $5.36 $23,000 0.0% Caféteria $5.36 $23,000
Network $16.87 $72,000 0.0% Network $16.87 $72,000
Envision Rx $4.71 $20,000 0.0% Envision Rx $4.71 $20,000
Stop-Loss/Cobra/Positive Pay $3.71 $16,000 0.0% Stop-Loss/Cobra/Positive Pay $3.71 $16,000
Transplant $13.61 $58,000 0.0% Transplant $13.61 $58,000
Stop Loss $73.97 $314,000 20.0% Stop Loss $88.77 $377,000
ACA Fees $0.43 $2,000 ACA Fees $0.00 $0
Total Admin: $145.38 $618,000 Total Admin: $160.45 $682,000
Current Other Costs PEPM Annual % Increase Projected Other Costs PEPM Annual
HMA Consulting $24.72 $105,000 0.0% HMA Consulting $24.72 $105,000
Total Other: $24.72 $105,000 Total Other: $24.72 $105,000
Total Admin $145.38 $618,000 Enrollment Total Admin $160.45 $682,000
Total Other $24.72 $105,000 354 Total Other $24.72 $105,000
Total Costs $170.10 $723,000 Total Costs $185.17 $787,000
$15.07 8.9%
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PROJECTING COSTS
Annual Cost
2018-2019 Plan Year 2019-2020 Plan Year
Revenue Budget Reforecast Before Chg After Chg Savings
City Contribution $5,469,000 $5,469,000 $5,517,000
EE Contribution $1,379,000 $1,391,000 $1,402,000
Total Premium $6,848,000 $6,860,000 $6,919,000
Cost
Gross Cost $6,444,000 $6,225,000 $6,919,000 $6,919,000 $0
Employee Contribution $1,279,000 $1,279,000 $1,291,000 $1,302,000 $11,000
Net Cost $5,165,000 $4,946,000 $5,628,000 $5,617,000 $11,000
Net $ Increase off Budget ($219,000) $463,000 $452,000
Surplus/(Deficit) $623,000 ($59,000) $0
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PLAN DESIGN
CONCEPTS
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PLAN DESIGN
CONSIDERATIONS
Competitive
Plans vs. Peers/
Benchmark
Good Cultural
Fit with the City
Adequate
Options for
Employees
Drive Desired
Behavior
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AREAS OF OPPORTUNITY
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© 2018 HOLMES MURPHY & ASSOCIATES
PHARMACY
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© 2018 HOLMES MURPHY & ASSOCIATES
FORMULARIES
OPEN FORMULARY CLOSED FORMULARY
All non-formulary drugs are available
Do not cover non-formulary drugs
except for medical necessity
KEY RX STRATEGY CONSIDERATIONS
• Contract terms and definitions
• Coalitions vs Direct
Best in Brand
purchasing
• Mail vs Retail
• Contract Pharmacy Network
• Role of disruption
Delivery
Optimization
• Generic/ Brand Tiering
• Specialty Tiering / Coupons
• 90- day steerage
Benefit Alignment
• Distribution network
• Place of Service Specialty Strategy
• Value of Medical integration
• Clinical efficacy
• Role of Disruption
Clinical Solutions
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RX COALITIONS – IS BIGGER
ALWAYS BETTER? – Across the board coalitions look to maximize negotiation power through larger membership
base
– Organizations behind coalitions vary: large consulting firms, broader based purchasing
cooperatives, public sector, labor organizations, health plans, integrated delivery systems
– Many incorporate scope of services beyond just the Pharmacy contract and may require
membership dues
– Considerations for joining a coalition may include:
Direct PBM Relationship Coalition
Pro Con Pro Con
Ability to customize
contract terms (i.e., audit,
market check)
Individual negotiation
required
Value of Group Purchasing
in pricing
Generally most beneficial
to small groups
Flexibility in plan design
and clinical approach
Independent oversight
required Audit Support
May need to compromise
to gain group consensus
Higher level of service with
individualized attention
More resources needed to
manage benefit program /
make decisions
Market check support
May not have flexibility for
formulary and clinical
program decisions
Retain independent
decision making
Reduced economies of
scale/purchasing leverage Collective Decision making Lack of independence
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TIME | MAY 2015
http://time.com/3858309/attention-spans-goldfish/
GOLDFISH= 9 SECONDS
HUMANS ONLINE= 8 SECONDS
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BASICS OF NETWORK
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MANAGED CARE CONTINUUM
Indemnity
Managed indemnity
Preferred provider organization
Point of service
Point of service (HMO)
Open panel HMOs (i.e., mixed, IPA)
Closed panel HMOs (i.e., staff, group)
Quality
Control
Cost
Effectiveness
Increasing cost effectiveness and quality control
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PREFERRED PROVIDER
ORGANIZATION (PPO)
PPO
In Network Out of Network
PCP Specialists Hospitals Unlimited Provider
Access
• No provider contracts
• No discounts
• Some large case medical mgmt.
(i.e, management, pre-
certification
• Open access
• Contracted providers
• Negotiated discounts
• Utilization/medical
management
• Open access in
network
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POINT OF SERVICE (POS)
Open Access Model
POS
In Network Out of Network
PCP
Unlimited Provider
Access Specialists Hospitals
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POINT OF SERVICE PLAN (POS)
WITH GATEKEEPER
Gate Keeper Model
POS
In Network Out of Network
PCP Unlimited Provider
Access
Specialists Hospitals
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ACO / HEALTH MAINTENANCE
ORGANIZATIONS (HMO)
ACO Model vs. Open Access HMO
HMO
Specialists Hospital Ancillary
Providers
PCP
HMO
Specialists Hospital Ancillary
Providers
HMO Type
Relationship of
Providers to Plan
Typical Practice Location
(for Providers)
IPA HMO Contractual Independent practice location
Group HMO Contractual/possible Medical group clinic-location
medical group employees
Staff HMO Salaried employees Facility owned by plan (i.e., Kaiser)
Mixed HMO Contractual/possible Varies - independent practice locations
medical group employees and/or medical group clinic
PCP
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BASICS OF PROVIDER
CONTRACTING
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OVERVIEW OF NETWORK
STRUCTURE
Network Manager
Inpatient Outpatient
Hospital Physician Ancillary
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HOSPITAL CONTRACTING
• Two major categories of distinction: Inpatient vs. Outpatient
• Contracting for inpatient services has several methodologies:
• Diagnosis related groupings (DRG)
• Per diems
• Discount fee-for-service
• Capitation
• Drivers of reimbursement methodology:
• Access/geography (rural vs. Inner-city location)
• Penetration of managed care in marketplace
• Sophistication of providers and contract managers negotiating deals
• Direction of volume
• Hospital stop loss contracts
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OTHER FRINGE
BENEFITS
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HEALTH AND WELFARE
BENEFITS
• Indemnity
• PPO
• POS
• HMO
• Indemnity
• PPO
• DMO
• Basic Life
• Supplemental
Life
• Dependent
Life
• AD&D
• Business/
• Travel
• Accident
• Salary
Continuation
• STD
• LTD
• EAP
• First
Responder
EAP
• Work/Life
• FSA
• Vision
• Educational
Assistance
• Group Legal
Medical Dental Disability Fringe
Benefits
Life and
Accidental
Death
Health and
Welfare
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OTHER CONSIDERATIONS FOOD FOR THOUGHT….
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Leave Strategies
Mental Health Strategies
Long Term Care (LTC)
Police and Fire Additional
Benefits
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