New Risks, Tighter Reinsurance Terms Pose Risk for Self-Funded Plans

A separate but related fact is the effect of underlying inflation on the highest cost claims, or the effect of leveraged trend. According to a recent report by the actuarial firm of Reden & Anders, this leveraged trend figure, which incorporates both the number of claims and the overall cost of claims from one year to another, is now rising at an annual rate of 20-to-50 percent for the most expensive cases.

So in terms of the financing and funding of health benefits, what does the future hold for self-insured employers and others at risk for the cost of medical care?

First, it may be very costly to make funding decisions based upon claims experience during a previous time period, which may underestimate changes to underlying unit cost and utilization rate.

Far too often, risk managers plan for coverage funding based upon a computed "average" cost. While this type of approach may hold value in projecting total expense, it may not be meaningful at all when analyzing the impact of future catastrophic expenses.

And while a plethora of new treatments and technologies have been introduced to more effectively manage chronic diseases, one possible by-product is a clustering of claims at lower, "noncatastrophic" levels. This is the "sweet spot" in chronic disease management that pharmaceutical manufacturers and others are seeking to capitalize on.

These issues are particularly important when making decisions on structuring and purchasing reinsurance. Reinsurers are pushing much higher limits and retentions and, in many cases, increasing the number of services excluded. In some cases they are also suggesting that certain members be "lasered" (i.e. excluded from coverage or included at a much higher stop-loss deductible level).

Failure to consider leveraged trend, additional exclusions and other factors in the new world of rapidly expanding health care technology could lead to much higher than expected retained expenses for employers

In addition, exclusions for certain high cost conditions, such as a member on a transplant wait list or a member with hemophilia that uses high doses of blood clotting factor, could quickly drain health plan reserves.

The challenge for self-funded employers is to maximize predictability, or to keep total expenses at or below budgeted or funded levels. This means structuring the optimum level of benefit funding, implementing risk management programs and ensuring solvency protection including adequate reserves.

Fortunately, employers are enjoying new options with the expanded role of disease management and carve-out coverage.

For a self-funded employer, a wide spectrum of disease management programs and carve-out coverage are now available. These programs range from simply decreasing the severity of potentially catastrophic events to removing risk entirely by transferring it to a third party. These programs should be evaluated in terms of positively impacting reserving requirements, deductibles, premium rates and improving stop-loss availability.

Once used almost exclusively by large health insurers, these sophisticated approaches are now attracting many large and jumbo employers who see the advantage in reducing risk and improving cost predictability.

Complete disease carve-out programs allow an employer to transfer financial obligation for a specific health care condition to a third party. Typically, these are conditions that are either high cost or unpredictable, such as an organ transplant.

For example, once considered experimental, a small bowel or intestinal transplantation (depending on which of four facilities in the country certified by Medicare handles the procedure) could result in expenses of $700,000-to-$800,000 for just the transplantation phase of disease treatment. With carve-out insurance, the risk is typically transferred on a "first-dollar" or very low (e.g. $10,000 per incident) deductible basis as soon as a covered employee is identified as needing a qualifying treatment.

Carve-out coverage programs can now be structured to cover the full episode of care. These new programs can be compared with a basic employer stop-loss policy, which restricts reimbursements based on incurred and paid dates. The new carve-out programs can cover expenses related to a specific disease (including follow-up care) that may continue for a year or longer.

Carve-out coverage programs allow employers the ability to manage their expenses in certain high-cost areas while affording their workers high quality care. For example, with carve-out coverage for organ and tissue transplants, an employer may pay a premium rate for coverage that encompasses treatment 10 days prior through 365 days following transplant surgery. All transplant-related expenses are included.

Alternate funding approaches can be developed to match the risk appetite (and balance sheet) of individual plan sponsors.

It is important to note that transplants, once the stuff of headlines, are more and more common. The United Network of Organ Sharing reports that there will be some 30,000 organs transplanted in 2003. (UNOS, located in Richmond, Va., is a nonprofit, scientific and educational organization that administers the nation's only Organ Procurement and Transplantation Network.)

Carve-out coverage, with partial-to-full risk assumption and intensive care management, is also available for severe burns and other trauma, premature birth, and oncology.

Coverage will soon be available for a number of other conditions such as congestive heart disease and renal disease. Firms that provide these services generally use sophisticated technology to evaluate disease conditions and treatment protocols, and have advisory boards comprised of the leading specialists in the particular field.

Many companies find it advisable to hire a health care consultant or specialized broker when evaluating carve-outs as part of a self-funded program. A broker highly experienced in these areas can help assess levels of risk, recommend program alternatives and secure competitive proposals.

Working with a specialized broker can also reduce the time and expense of evaluating multiple vendors, particularly when trying to evaluate overall net cost to the plan sponsor. Again, all programs are not created equal. The broker can help ensure the company contracts with a vendor that is well capitalized and has the credentials, systems and case histories of providing specialized care management cost effectively and with excellent outcomes.

Ideally, a broker will also provide a realistic view of the risks, costs and estimated savings associated with a particular program.

Health care consumers marvel at the latest medical technology and pharmaceutical breakthroughs when they are reported on TV. Pharmaceutical manufactures are investing huge sums of marketing dollars to ensure they realize an attractive return on investment on their research and development expenditures.

For risk managers, these technologies and other health care trends have created a world of escalating costs that show no near-term signs of abatement. To succeed in this environment, risk managers increasingly need to use all the tools available to intelligently predict and manage risk.

Charles Crispin is president and chief executive officer of Evergreen Re, a health care consulting and brokerage firm based in Stuart, Fla., that provides reinsurance and other risk reduction products for plan sponsors. He can be reached at www.evergreenre.com

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, November 7, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.