Actuarial, Legal, Reporting and Disclosure

Requiring all participants to undergo annual medical underwriting before selecting an option

The course lists six controls: limit choices, pair benefits, core benefits, graded benefits, age-rated pricing (self-funded only), and offsetting selection through subdivision. Annual medical underwriting is not listed as a control method.

Anti-selection is so severe that the high-benefit plan self-destructs when the few healthy participants refuse to carry the increasing number of sick ones

The course states the horror story to avoid is where anti-selection is so severe that it causes the high-benefit plan to self-destruct, which can occur when the few healthy ones in the pool refuse to carry the increasing number of sick ones.

The type of HMO (staff vs. IPA) and geographic location

The course states that research shows not all HMOs will agree that they get only the younger and healthier risks; it depends upon the HMO (staff vs. IPA, geographic, etc.).

Some people in poor health have a mental block against recognizing that fact, so they do not select the high-benefit plan

The course lists several dampeners: some people out of fear gravitate to high plans; unless the price spread is large, why choose the low plan; employers can influence choice through communications; some in poor health have a mental block against recognizing it; and people are not sophisticated enough to outguess the system.

Gather data and analyze it, project with trending, estimate populations by option, anticipate and factor in anti-selection

The course lists the basic pricing procedure as: Step 1 — Gather data and analyze it; Step 2 — Project with trending; Step 3 — Estimate populations by option; Step 4 — Anticipate and factor in anti-selection.

Healthy and younger risks went to the HMO (Plan B), leaving the indemnity plan with an older and sicker group that drove up the loss ratio

The course explains that the healthy and younger risks went to Plan B (HMO), leaving Plan A with an older and sicker group. In broad terms, people with actual or perceived needs gravitated to the high-benefit plan, causing the loss ratio to rise from 75% expected to 95% actual.

Contributions sufficient to pay claims and expenses, equitable distribution, encouragement of cost containment, and simplicity

The course lists four traditional pricing objectives: (1) contributions sufficient to pay claims and expenses, (2) equitable distribution, (3) encouragement of cost containment, and (4) simplicity.

Plan B (HMO) had an actual loss ratio of 55% versus expected 63%, indicating it attracted healthier risks than anticipated

In the example, Plan B (HMO) had an expected loss ratio of 63% but an actual of 55%, meaning it attracted healthier-than-expected risks. Meanwhile, Plan A (Indemnity) went from 75% expected to 95% actual due to adverse selection concentrating sicker risks.

Adequate, equitable, consistent, and competitive or reasonable

The course states that the criteria for satisfactory self-funded contributions are: adequate, equitable, consistent, and competitive or reasonable.

6% to 12% to adjust for increased medical utilization and inflation

The course states that paid benefits should be increased by some percent (6%-12% range is common) to adjust for increased medical utilization and inflation.

4.2 months of average paid benefits

The course notes that group major medical benefit reserves are in the two months of average paid benefit range as a rule of thumb, but the safe harbor limit of the Code is 4.2 months of average paid benefits.

About three months of average claims

The course states that if the plan year experience is first year only, the beginning reserve is $0; the ending will be about three months of average claims.

Using the year-end count would overstate the population and understate the per-capita costs

The course states that if the participant count increased during the plan year, the average count is needed; to use the plan year-end count would overstate the population and understate the costs.

Some downward adjustment in paid benefits, since these nonrecurring large claims will not repeat

The course states that if the $1,000,000 has numerous large claimants (over $50,000 is a fair guide) who have since recovered or terminated, some downward adjustment in paid benefits would be suggested. Conversely, where potential large claimants are known but not yet reported, an upward adjustment is appropriate.

After October 24, 1995, the dual choice mandate ended, but the financial discrimination rule remains

The course states that after Oct. 24, 1995, employer contributions for any federally qualified HMO may not financially discriminate. Although the HMO dual choice mandate is gone, the financial discrimination rule remains and applies to any employer offering a federally qualified HMO.

For each enrollee in a given class based on these attributes, the employer contributes an equal dollar amount regardless of the plan the employee chooses

The course quotes CMS regulations: An employer's contribution may reflect the composition of enrollees according to attributes such as age, sex, and family status that are reasonable predictors of utilization, experience, costs, or risk. For each enrollee in a given class, the employer contributes an equal dollar amount, regardless of the plan chosen.

The review of data is acceptable, but the naming of the person and the disease should be avoided

The course states that direct employer review of who are the high utilizers and for what reasons is a method of controlling anti-selection. Legal difficulties arise in that such analysis may violate state privacy and federal HMO regulations. The review of data is acceptable, but the naming of the person and the disease should be avoided.

The carrier must obtain separate state licenses for each product line in every operating state

The course lists three practical difficulties with the single carrier option: (a) geographic restrictions, (b) the need to offer a staff model as well as an IPA model where available, and (c) the employer sees only a single cost. Separate licensing is not mentioned.

Capitate only what is controllable — the more the physician does in-office, the more of the practice risk may be capitated

The course discusses business control risk in capitation pricing and states a good rule of thumb: capitate only what is controllable. The more the physician does in-office, the more of the practice risk may be capitated.

Reduction in stop-loss premiums attributable to managed care network discounts

The four elements are: (1) savings from discounts and utilization control, (2) incremental value of richer managed care design, (3) incremental administrative fees paid for access to managed care, and (4) lost employee contributions resulting from managed care elections.

By accessing charges per claimant and converting the figure to charges per participant

The course states that the actuary accesses charges per claimant and converts the figure to charges per participant to determine gross savings from managed care.

Distributing the fixed amount among key players becomes a matter of controversy, along with financial solvency and growth decisions

The course states that because the PHO receives a fixed amount per member, distributing that money among key players becomes a matter of controversy. Financial solvency and growth also are issues.

High frequency with relatively low maximum benefits

The course states that the nature of the short-term disability risk is one of high frequency with relatively low maximum benefits.

Industries with a highly educated workforce and low physical labor requirements

The course lists industries needing careful STD underwriting as having: high turnover, seasonal employment, poor financial condition, highly cyclical or prone to failure, remote locations, high frequency of work-related disability, and self-employment. Highly educated/low physical labor is not listed.

Fewer than 10 to 20 employees; it determines whether the carrier will offer coverage and at what premiums, not participant eligibility

The course states that medical underwriting is generally required on small groups (fewer than 10 to 20 employees) and for individuals with high coverage amounts. This underwriting does not determine participant eligibility but rather whether the carrier will offer coverage and appropriate premiums. It does not violate HIPAA.

Plans with full maternity: 102%; plans without full maternity: 95%

The course states that for the most recent industry experience reported, the ratios of actual to expected were: plans with full maternity — 102%, and plans without full maternity — 95%.

By benefit content comparisons

The course states that when plan benefits are modified, the effects will appear at once in funding levels, stop-loss premiums, COBRA premiums, etc. Such plan cost changes are not measurable by experience methods; they are measured by benefit content comparisons.

Claim cost per participant increases with attained age, benefit increases with length of service, and benefit may be paid while the participant is not deemed an employed worker

The course states that FAS 112 is triggered by any of these conditions: (1) claim cost per participant increases with attained age, (2) benefit increases with participant's length of service, and (3) benefit may be paid while the participant is not deemed an employed worker.

When it can be actuarially demonstrated that there is parity in the differential considering all relevant factors

The ADA permits benefit differentials within a plan conditional on age, sex, health condition, etc., so long as it may be actuarially demonstrated that there is parity in the differential considering all relevant factors.

A high-limit lifetime maximum with a directive and a reduced lifetime maximum without a directive

The course provides an example where typical parity is (a) high-limit lifetime maximum with a directive or (b) reduced lifetime maximum without a directive. The amendment must be supported by actuarial certification of parity.

Additional claims from raising the lifetime maximum are offset by reduced claims from savings attributable to the directive, and those with directives are more prudent healthcare purchasers

The course explains cost-neutrality on two grounds: (1) Actuarial — additional claims from raising the maximum are offset by reduced claims from directive savings, and (2) Underwriting — those with a medical directive are more prudent (less costly) healthcare purchasers, at least for facility-related care.

Monte Carlo simulations were used, and the concern is that because the analysis is so far right on the lognormal curve, any margin of error must be of concern

The course states that several simple models were created using Monte Carlo simulations. The concern noted is that because the analysis is so far right on the lognormal curve, any margin of error must be of concern.

Because guaranty association coverage will in most instances not be available to protect the employer where such failure occurs, since the employer (not individuals) holds the stop-loss policy

The course states that insurers can fall on bad financial times and fail, and the statutory safety net known as the life and health guaranty association coverage will, in most instances, not be available to protect the employer where such failure occurs. This is one of the arguments against the fully insured equivalent method for COBRA.

They slow down claims processing, which increases the claim reserve

Question 3 of Section B states that first generation cost-containment provisions all have the effect of slowing down claims processing. Examples include second opinions, pre-cert and recert, preadmission testing, and ambulatory surgery. Slower processing means a larger claim reserve.

FAS 35 (Accounting and Reporting by Defined Benefit Pension Plans)

The course states that where a health and welfare plan has plan assets, the valuation methods should follow FAS 35 (Accounting and Reporting by Defined Benefit Pension Plans). This is one of the significant changes SOP 92-6 introduced to plan financials.

The Missouri Supreme Court's holding in the Monsanto case that self-funding is not doing a business of insurance

Prior to ERISA, Missouri challenged Monsanto's self-funded plan, and the Missouri Supreme Court held that self-funding did not constitute doing a business of insurance for purposes of state regulation. This was an important pre-ERISA precedent. ERISA later codified this concept through the deemer clause.

$100 per day

ERISA §502 provides that a court may assess a $100/day penalty against a plan administrator for willful refusal to provide requested information to a participant or beneficiary. This penalty serves as a deterrent to ensure plan administrators comply with disclosure obligations.

The claim is timely because the six-year-from-breach deadline has not passed and the three-year-from-discovery deadline has not passed

ERISA's statute of limitations for fiduciary breach claims is the earlier of six years after the breach occurred or three years after the breach was known or correctable. Here, the participant is within both windows: five years from breach (under the six-year limit) and two years from discovery (under the three-year limit). The six-year fraud exception is not needed.

The McCarran-Ferguson Act

The McCarran-Ferguson Act, enacted in 1948, preempts federal regulation of insurance so long as states provide effective regulation. This act established the principle of state primacy in insurance regulation. Were federal regulation to replace state regulation, some advantages enjoyed by self-funders over fully insured plans would be eliminated.

The fiduciary is liable because he knowingly concealed the breach by failing to act on his knowledge

Under ERISA, a fiduciary assumes liability for a co-fiduciary's breach if he or she (a) knowingly partakes or conceals the breach by acting or not acting on the knowledge, (b) fails in his or her own duties so as to cause the co-fiduciary to breach, or (c) fails to remedy a breach once it is known. Knowingly allowing the breach without acting triggers liability under the first prong.

A federal district court, though state courts may have concurrent jurisdiction for actions to recover benefits or clarify rights

All ERISA actions must originate in a federal district court. The one exception is that a state court of competent jurisdiction may have concurrent jurisdiction in actions to recover benefits or to enforce or clarify rights. The district court has jurisdiction without respect to the amount in controversy or the citizenship of the parties.

The state anti-subrogation statute is preempted by ERISA, and the self-funded plan may enforce its subrogation rights

Multiple cases (Davis v. Line Construction Benefit Fund, Hunt v. Sherman, Dillard v. Teamsters, United Food & Commercial Workers v. PACYGA, and FMC Corp. v. Holliday) have established that self-funded plans may enforce subrogation rights because state anti-subrogation statutes are preempted by ERISA. The savings clause does not apply because self-funded plans cannot be deemed insurance under the deemer clause.

The DOL, a participant, a beneficiary, or another fiduciary

ERISA §502 provides that actions for breach of fiduciary liabilities may be brought by the DOL, a participant, a beneficiary, or a fiduciary. This broad standing ensures that fiduciary breaches can be addressed by multiple stakeholders. Personal liability for the breaching fiduciary may result.

The stop-loss policy was underwritten by a captive insurance company related to the employer

In United Food & Commercial Workers v. PACYGA, the court held that excess loss was not insurance for preemption purposes because (1) the participant is in no way the beneficiary, (2) the insurer does not become involved in plan administration, and (3) companion life benefits are treated separately. The court did not base its reasoning on captive insurance arrangements.

Either the qualified pension plan test, a 70%-80% coverage test, or a classification test

The Revenue Act of 1978 requires breadth of coverage for self-insured medical reimbursement plans. Either the qualified pension plan test, a 70%-80% coverage test, or a classification test must be satisfied. These tests ensure that self-funded plans do not discriminate in favor of key employees.

They are unsecured claims for contributions to an employee benefit plan, ranking below wages but above other unsecured claims, limited to $2,000 per participant

Under bankruptcy law, unsecured claims for employee benefit plan contributions have a specific priority ranking: below wages/salaries but above other unsecured claims. The claims must relate to services incurred within the six-month period prior to filing, and the maximum amount is $2,000 per participant. Self-funded plan participants' rights to unpaid benefits are essentially those of general creditors but with this limited priority.

It has contributed significantly to the growth of self-funded plans by generally shielding them from state regulation

The ERISA preemption provision has contributed significantly to the growth of self-funded healthcare benefit plans. Since ERISA was enacted, the deemer clause prevents states from deeming self-funded plans to be insurance, which generally means states cannot regulate them. This is a key competitive advantage over fully insured plans.

The plan supervisor may be expected to pay the claims under the co-fiduciary obligation rules for failing to act on knowledge of the employer's wrongful conduct

The course specifically warns that where the plan supervisor is mindful of wrongly motivated employers who capture reserves or gain a float advantage with employee contributions and does nothing, the plan supervisor may be expected to pay the claims under the co-fiduciary obligation rules. Plan supervisors should be alert to these motivations and terminate such arrangements.

Administrative expenses, then unsecured claims arising after filing but before trustee appointment, then wages/salaries, then employee benefit plan contributions, then other unsecured claims

Under federal bankruptcy law, the priority order is: (1) administrative expenses, (2) unsecured claims arising after bankruptcy filing but prior to appointment of trustees, (3) unsecured claims for wages/salaries/commissions/vacation/severance/sick pay/disability, (4) unsecured claims for contributions to an employee benefit plan, and (5) other unsecured claims. Employee benefit contributions rank below wages.

The state law is likely preempted because it indirectly imposes a benefit mandate on an ERISA-covered plan through a requirement applied to the TPA

In general, ERISA preemption is weaker when a state law applies to a vendor rather than the plan itself. However, state laws that try to impose obligations on ERISA-covered group health plans indirectly through requirements on TPAs usually fail, especially if the state law requires a plan change or mandates a particular benefit. A law requiring TPAs to cover specific benefits effectively mandates plan benefits.