40 MEDICAL SELF-FUNDING MACRO TRENDS Phillip Giles, of QBE, talks to Captive Review about the knock-on effects on the insurance industry of more employers incorporating employee healthcare programs in captives 42 EMPLOYEE BENEFITS THE BUSINESS CASE FOR HUMAN RESOURCES Stephen James of Mercer discusses how employee benefit captive solutions can aid HR departments 44 MAKING EB RISK AN ADVANTAGE Marine Charbonnier of AXA Corporate Solutions and David Schupak, MetLife regional director, explain how the MAXIS Global Benefits Network can help captives efficiently incorporate employee benefits risk into their captive vehicle EMPLOYEE BENEFITS FOCUS EMPLOYEE BENEFITS | QBE MEDICAL SELF-FUNDING MACRO TRENDS Phillip Giles, of QBE, talks to Captive Review about the knock-on effects on the insurance industry of more employers incorporating employee healthcare programs in captives S elf-insurance is generally con- sidered to be the most pure and efficient form of alternative risk transfer and nowhere is the use of self-insurance more prevalent than employers self-funding their employee healthcare coverage. Just 15 years ago, about 48% of US employ- ers were self-funding healthcare coverage. This has risen to about 61% in 2015. The num- ber will continue to grow as the progressive effects of the Affordable Care Act (ACA) con- tinue to matriculate. Now that self-funded healthcare has become the most widely employed form of alternative risk transfer, I thought it might be good to identify some of the more obvious and high-level trends that are projected to significantly influence an employer’s deci- sion to self-fund their employee healthcare plans. Healthcare systems will continue to merge and consolidate Large healthcare systems are purchasing smaller systems and independent specialty practices at a record rate. Consolidation of everything, from the primary care physician practices through the most sophisticated specialty providers, empowers larger sys- tems with the ability to capture and conse- quently control all phases of healthcare in order to pyramid their internal income and profit. The independent family practitioner is quickly becoming a dinosaur and is on the Written by Phillip Giles Phillip C. Giles is vice-president of sales and market- ing for QBE North America and oversees Accident & Health sales and strategic marketing initiatives as well as medical stop loss captive business. verge of extinction; as the species evolves from independent practitioners to employee practitioners. Larger health systems, having more physicians and treating more patients, will also receive a bigger slice of the federal pie as Medicare and Medicaid payments are distributed to providers based, in part, on size. As healthcare systems consolidate and grow: PPO networks, in their present form, will become obsolete Through consolidation there will be a reduc- tion in competition among providers even while the Federal Trade Commission and US Justice Department are watching. The value of Preferred Provider Organisation (PPO) arrangements is being reduced. Decreased provider selection coupled with increased demand for provider access has diluted the concept and value of why these arrange- ments were created. The premise of the PPO at its core is steerage to a select panel of providers in return for competitive pric- ing. Consequently, it will make little sense 40 August 2015 captivereview.com for several different people having the same medical condition, going to the same pro- viders, within the same healthcare system to be charged completely different costs for the same treatment simply because they have different medical insurance cards. As PPO networks become obsolete: More employers will convert to referenced-based pricing (RBP) structures Under the current PPO system, buying healthcare in the US has deteriorated to a process that is similar to purchasing an automobile; the sticker price has no rele- vance to reality. Many providers will charge a grossly inflated price knowing they are likely to receive only 60% of billed charges from a commercial insurer which is still much more than Medicare and Medicaid based on nego- tiated discounts. This will change. Reference-based pricing (RBP) is a benefit design in which the healthcare plan defines the maximum amount it will cover for a par- ticular health care service. RBP plans provide a more defined, or at least a less ambiguous, fee structure as provider reimbursements are tied to a specific reference point, Medicare’s reimbursement for the procedure or service. This can either be Medicare Plus, the Medi- care reimbursement point as a base plus a defined margin. The margin usually ranges between 20% and 60%, Medicare plus 40% for example. RBP plan design can also take the form of a defined benefit schedule. This type of schedule specifically defines the max- imum dollar amount assigned by the benefit QBE | EMPLOYEE BENEFITS plan for each treatment or procedure. As self- funded plans have more plan design flexibil- ity, RBP designs will become most prevalent with employers self-insuring healthcare cov- erage as a cost-containment strategy. As RBP plans become more prevalent: Systemic healthcare consumerism will improve Increased use of RBP plan structures will require employees to become better edu- cated healthcare consumers as they will need to shop for practitioners willing to provide services within the RBP fee schedule of the employer’s healthcare plan. Providers are increasingly willing to negotiate and accept realistic Medicare Plus structures. However, when more of a ‘defined benefit’ schedule is used, any cost coverages will become the responsibility of the covered individual. This will necessitate those employees to become more price conscious when shopping for non-emergency procedures and selecting providers for treatment. As employees become more accustomed to shopping for healthcare services: Provider pricing and patient outcome scores will become more transparent Providers are facing increasing pressure to publish their pricing structures and mak- ing them more accessible to consumers thus allowing covered employees to shop for the best price. There is a significant variation in medical prices, even for the most common procedures, throughout the US Increased provider transparency will ultimately con- tribute to lower costs and reduced spending. Many large insurance carriers are now pub- lishing the fee schedules of their contracted providers. Online ‘transparency tools’, such as Castlight Health, Mpower360, and Health- care Blue Book, publish provider pricing information and make pricing information widely available. Many of these tools are available in mobile application format. It is also important to note that employ- ees, whether covered under an RBP or even a ‘traditional’ plan, should not select providers based solely on price. Quality of care is also a critical consideration. Just as pricing has become more transparent, so have the quali- tative patient outcome of scores of providers. These scores measure the success and related complication rates of procedures performed by various providers to determine a qual- itative score. Precise qualitative scoring is currently a bit more difficult measurement. However, when available, it can be paired with pricing data to effectively find the best care at the best price. For self-funded plans, PPO networks will gradually evolve into nego- tiated RBP networks that contemplate both pricing and quality of care into the provider reimbursement schedule. A study published by the Employee Ben- efit Research Institute last year concluded that RBP plans can ‘save billions in health- care costs’. Self-funded plans currently have the most flexibility in terms of being able to implement a Referenced Based Pric- ing design. As more employers elect a self- funded approach, more will also implement an RBP structure. The combined advantages associated with self-funding and the installa- tion of a well-planned RBP schedule can ulti- mately lead to decreased costs and increased quality of care. Effective employee communi- cation, education and advocacy are critical to the success of a RBP plan. As employers seek to increase employee engagement relative to benefits: Cost-sharing with employees will escalate The looming ‘Cadillac Tax’ provision of the Affordable Care Act (ACA) to be implemented in 2018 calls for a 40% non-deductible tax on the value of any benefits provided to are ‘excepted benefits’ and not subject to the Cadillac Tax valuation. The Cadillac Tax will also lead to increased interest in employer self-funding. As interest in self-funding escalates: More employers will embrace ‘big data’ to identify and analyse cost trends More data is now readily available through- out the universe than ever before. Large self- funded employers, and those using captives, are increasingly accessing and mining large amounts of data to identify claim trends and large cost drivers. Use of external data to establish specific industry, geographic and demographic trends for comparison with the employer’s own data will help larger employ- ers identify potential benefit plan modifica- tions to address both claim frequency and severity. The primary issue for data users will be how to effectively distill huge amounts of data into what actually becomes useable informa- tion for predictive modelling. In order to con- vert the data into useable information, the employer must have pre-established objec- tives and know what specifically they are try- “Increased use of RBP plan structures will require employees to become better educated healthcare consumers as they will need to shop for practitioners willing to provide services within the RBP fee schedule of the employer’s healthcare plan” employees exceeding a maximum threshold of $10,200 for enrolled individuals or $27,500 for family coverage. Barring repeal, the tax will cause many employers to shift plan costs to employees as a way to reduce the overall value of the benefits. The cost shifting will normally take the form of increased out-of- pocket (OOP) deductibles and coinsurance. The 2015 OOP maximums for 2015 are $6,600 for individuals and $13,200 for fam- ilies. The increased cost sharing will create a surge in the popularity of voluntary products such as ‘GAP plans’ designed to provide hos- pital indemnity and critical illness benefits in amounts that dove-tail with the higher OOP burdens that will be faced by employ- ees. Some of these plans can be provided on a voluntary or employer-paid basis and as such 41 August 2015 captivereview.com ing to measure. These data benchmarks can include: underwriting probability, specific claims trends or outcomes within specific geographic areas, diagnoses or even health- care providers. The objective of the analysis needs to be clearly defined in order to know what information needs to be extrapolated. The resulting data can be applied to the ben- efit plan design to structure cost containment strategies. Given the volatility and uncertainty of the current political environment, especially with a presidential campaign on the horizon, I’ll reserve the right to amend any of these pre- dictions on short notice. One thing that won’t change is that a properly constructed self-in- surance or captive plan is the most efficient hedge against insurance cost uncertainty. EMPLOYEE BENEFITS | MERCER EMPLOYEE BENEFITS THE BUSINESS CASE FOR HUMAN RESOURCES Stephen James of Mercer discusses how employee benefit captive U sing a captive to reinsure employee benefits is a hot topic – it has been discussed at recent captive and risk management forums. How- ever, there are still only around 65 captives globally that include international employee benefits (i.e. benefit programmes outside of the US). Given that there are more than 6,000 captives, and the apparent interest in the area, this number seems low and rather surprising. There are many reasons for this, although with the right support the obstacles can be overcome. The financial advantages of using a cap- tive for reinsuring employee benefits are the same as those for non-life risks: direct cost savings predominantly through the capture of underwriting risk and profit margins, and tax optimisation. The key to making the change for employee benefits is to leverage the human resources function as it is they who have traditionally been involved in not only the design of the benefits, but also their management and purchase. solutions can aid HR departments Written by Stephen James Stephen James is a principal within the Mercer Inter- national Consulting Group, based in London. Along with his expertise on a broad range of global issues, he leads Mercer’s support to companies on employee benefit captive solutions outside of the US. Making the business case for HR Clearly, the cost savings can be compelling, but using a captive for employee benefits can provide so much more to the organisation, especially to human resources. • Improved benefit design Within the external insurance market, benefit designs and terms and conditions are largely dictated by the insurer. The use of a captive to bear the risk and cost of the benefits ena- bles an organisation to create a more flexible benefits environment. This can be through 42 August 2015 captivereview.com enhanced benefits, improved terms and con- ditions, fewer restrictions/exclusions, or har- monisation across markets. It is also expected that the premium cost of supplying the benefits will reduce under the captive model, so the cost of provid- ing any enhanced benefits may be broadly equivalent to the cost of what is currently delivered under the external insurance model. In organisations where benefits play a large role in employee engagement and retention, these enhanced benefits can be a critical tool. • Capacity issues For some organisations, it is impossible or cost prohibitive to provide life insurance to high- net-worth individuals. For example, owing to a high concentration of risk in Canary Wharf in London, insurers are sometimes unable to provide the coverage needed for senior exec- utives based there. However, when the risk is passed to the captive, this capacity issue with the insurer is bypassed. MERCER | EMPLOYEE BENEFITS It is also important for the captive to under- stand its risk profile, and reinsurance protec- tion can be purchased to protect the captive from any catastrophic or concentration of risk. It should be noted that when it is difficult to obtain cover for senior executives due to capacity issues and the captive has provided the capacity for them, reinsurance protection may be difficult for these individuals. • Underwriting waivers From a human resources perspective, the medical underwriting demands of the insur- ers are a sensitive topic for the individuals involved and the company. Having senior executives or other employees under- take medical examinations is a difficult message to communicate, but the use of a captive enables an organisation to be more discretionary with medical under- writing requirements as 100% of the risks are being borne internally. ernance framework. The framework should not only cover items such as strategic insur- ance partners, internal and external roles and responsibilities, and suggested timings and processes, but also stipulate that benefit design change approvals must be ratified by the captive. It should also detail the escalation procedure for any claims disputes, ensuring the captive has the final say on whether a disputed claim should or should not be paid. Although an additional cost, the ability to pay or continue to pay sensitive claims to a valued employee or to his/her beneficiaries may be particularly wel- come by human resources from an employee perception and value standpoint. One reason could be simply that human resources are not aware of the captive and how it could be used for employee benefits. It is the risk management department who would traditionally be involved in the management and operation of the captive and any non-life insurances, not human resources, and unfor- tunately in many large organisations these two important corporate functions have little interaction. Involvement of the risk manage- ment department could be seen as encroach- ing on human resources’ territory. Similarly, there may be individuals in the risk manage- ment department who are comfortable with non-life insurances but are not familiar with the local complexities of the employee benefits market and this may cause reluc- tance to include these risks. There is also little doubt that along with increased involvement, control and oversight that using a captive can bring, comes an additional work burden. One advantage of using multinational pooling, other than for key sign-off and decision authorisation, is that much of the work is outsourced to the global broker. This is particularly advantageous for organ- isations with limited resources in the corporate function, or with little human resources presence in some countries. In a captive model, much more of the work is man- aged centrally. This can be daunting and it will be important for such an organisation to either obtain additional internal resource or to seek external support. A suitable organisation for the use of a cap- tive for employee benefits is one with opera- tional will and control that is willing to lead from the top. Too often in the case of multina- tional pooling, the decision making authority remains in the hands of local human resources and the result is that the pooling arrange- ments do not grow or are not well maintained. If an organisation is serious about moving to a captive, decision making authorities must shift more towards the corporate centre to generate large, stable arrangements, and to ensure these are maintained. “From a human resources perspective, the medical underwriting demands of the insurers are a sensitive topic for the individuals involved and the company” • Improved governance, oversight and control Many large global organisations have a detailed and thorough understanding of the benefits practices in their headquar- ter country, and for some of their larger operations, but not in other locations. Addi- tionally, as organisations expand into differ- ent geographies, ensuring the benefits given to employees meet both internal company policies and local regulatory requirements is extremely important. There are many ways to address this: • Benefit inventories provide a snapshot of design but are often poorly maintained and limited by a lack of clarity on cost/ financial data; • Multinational pooling provides sum- mary cost data but the reporting lags can make the data relatively meaningless. Also many organisations take a passive approach so the pools only encompass a fraction of the global benefits; • The use of a global broker provides a mechanism to encompass full support on legislative updates, design elements, and improved reporting and transparency on costs. However, if a company wants to take full control of the cost and risks of benefits then more is required, and using a captive is an ideal step-change. We recommend that a senior representa- tive of the human resources function is made part of the captive board if employee benefits are included to help establish a rigorous gov- Additionally, in locations where the captive has full transfer of premium and risk, it has the ability to stabilise premium increases and reductions as appropriate rather than being at the mercy of the vagaries of the insurance market cycle as is the case with multinational pooling. • More detailed and more frequent reporting Through the selected fronting network part- ners, reinsuring employee benefits to an organisation’s captive enables access to a wider range of more granular and frequent data. This data can be used to identify key claim drivers and enable organisations to focus health and wellbeing initiatives to the areas that will have the most impact. Although there are many external and internal organi- sational factors that influence an employee’s health and wellbeing, having data on top claim causes is an important weapon in the battle against the rising costs of low productivity due to employee illness, disease and absenteeism. So why aren’t more companies doing this? It seems the case for human resources is rela- tively clear given the potential advantages that using a captive can bring to the organisation, but there are still relatively few companies that have made the journey. Why is this? 43 August 2015 captivereview.com The future We expect a continued increase in the use of captives for reinsuring employee benefits. The shift in costs from the public sector to the private sector and demands of increasing glo- balisation has forced multinational companies to find ways of better controlling, monitoring and evaluating their employee benefit pro- grammes. A captive is a useful tool in achiev- ing these objectives. EMPLOYEE BENEFITS | MAXIS MAKING EB RISK AN ADVANTAGE Marine Charbonnier of AXA Corporate Solutions and David Schupak, MetLife regional director, explain how the MAXIS Global Benefits Network can help captives effi ciently incorporate employee benefits risk into their captive vehicle Captive Review (CR): As an expert of P&C Captives, what are the advantages for a multinational organisation to put employee benefit risk into its captive? Marine Charbonnier (MC): When P&C Cap- tive clients incorporate employee benefits (EB) into their captives, it gives them greater purchasing power. Pooling risk between all the countries they operate in creates advan- tages relating to economy of scale, and by having a larger pool, you also decrease vola- tility. Speaking about volatility, by integrating EB risk, which is historically less volatile, into P&C risk which has very high-level risk, our clients are also able to decrease the overall volatility within the captive. At the same time, our clients increase the solvency of their captive in case of a major incident without significantly adding to the captive’s overall risk. It can be advantageous for both the local subsidiaries and the parent company to par- ticipate in a captive arrangement. Benefits include a more even distribution of risk, cost savings, and a more consistent EB policy throughout the world. CR: In the context of Solvency II, does EB risk offer a substantial opportunity to opti- mise risk and capital management? MC: Solvency II gives people an additional incentive to incorporate EB programs into their captives, but it isn’t the only driver. Captive EB risk programs are a legitimate longer to incorporate than other risks in the P&C market. Marine Charbonnier Marine Charbonnier joined AXA Corporate Solutions in 2013 as head of Risk Financing Solutions for Group AXA clients. She helps clients to identify financial solutions for their specific P&C risks and create cus- tomized solutions. David Schupak David Schupak, based in London, UK, is the Euro- pean regional director for MetLife and works with the MAXIS Global Benefits Network. He joined Alico, now a part of MetLife, in 1998 and has worked throughout Latin America and Europe. Schupak has extensive experience with employee benefit captive programs and currently has overall responsibility for ten of the largest captive programs in the MAXIS network. strategy regardless of Solvency II. I think we’ll start to see more captives incorporate EB into their risk portfolio under Solvency II in the near future. Some have already done it and a lot are thinking about it. However, it’s a long process to efficiently incorporate an EB program, as you need a lot of claims data which you won’t initially have gathered whilst getting EB insurance from the traditional market. EB typically takes 44 August 2015 captivereview.com CR: What is the MAXIS Global Benefits Net- work’s solution to this issue? How can your program benefit businesses? David Schupak (DS): The MAXIS Global Ben- efits Network, which is a strategic venture between MetLife and AXA, has been a pioneer in EB programs for captives. We have been in this industry since 1992, and we have really grown with the industry in this time. Even today, the majority of captives still primarily comprise property and casualty risks, but employee benefits is becoming a lot more common. One of the reasons behind that is that it’s a great way for captives to diversify their risk. We offer solutions in over 110 coun- tries and we are able to reinsure from many of those countries to the captives; not only are we present in developed markets but also in the developing world. The key advantage of that is that our clients get access to data that allows them to predict, with much greater accuracy, how risks will behave. We are arguably leading the market with the analytics tools we’re providing to cap- tives, specifically within the medical insur- ance space. CR: What does your offering have that oth- ers in the space do not? DS: We stand out in the way we provide data to our clients. Our competitors are all doing well at providing basic data, but we take it one MAXIS | EMPLOYEE BENEFITS step further by providing a deep analysis that gives clients detailed insight into medical claims cost drivers in specific countries. Once our clients have that data, they can begin to tailor their plans and take action with the goal of lowering claims volume over time. We offer this type of analysis in many of the countries where we currently have a presence. By developing a template we can take medical data, standardise it, and offer that to the captive manager and the parent company so they can really understand and compare how each country is behaving. CR: What kind of variations are you finding between regions? DS: Claim drivers are impacted by several factors, including the kind of industry, the way the state system operates, and different demographics. For example, in the US, Mex- ico and even in the Gulf, we are now seeing hypertension, and diabetes is a massive claims driver; we didn’t see it much before, but now it’s a global issue. In order to coun- ter this, we’ve started focusing on health “Our competitors are all doing well at providing basic data, but we take it one step further by providing a deep analysis” and wellness, because once you understand where your claims come from, you can act to minimise claims and the costs of those claims. We offer a great deal of flexibility to tailor plans to do this. CR: What are the challenges of implement- ing this strategy? What are the most com- mon pitfalls? DS: Internal communication issues are pri- marily the problem. Captives historically sit under risk, whereas employee benefits sit under HR. A business’ HR department may want to follow a particular health plan, whilst 45 August 2015 captivereview.com a captive may not agree that makes sense, and this can only be resolved through efficient communication from the top down. On the other hand, a captive may well want to take on EB, but if they hav- en’t explained that to the HR side of the business there will be on-going chal- lenges and push-back. Communication between the captive and the parent company is key, but also between the parent and local partners, who may not initially understand why they must work with a captive network or how a captive works. It’s not difficult to explain the concept, but we still see a lack of communication more often than we would like. Again our offering includes a service to assist in regard to this issue. MAXIS GBN MAXIS Global Benefits Network is one of the world’s leading global benefits networks. Established by AXA and MetLife, two of the world’s largest and most trusted companies, MAXIS GBN is able to offer holistic global benefit solutions, tailored to meet the unique needs and objectives of our clients in 110 mar- kets around the world. Catastrophic medical claims aren’t just a probability — they’re a reality. As a Captive Director, Risk Manager, VP of HR or CFO, QBE’s Medical Stop Loss Reinsurance and Insurance can help you manage those benefit costs. With our pioneering approach to risk and underwriting, we make self-insuring and alternative risk structures possible. Individual Self-Insurers, Single-Parent and Group Captives For more information, contact: Phillip C. Giles, CEBS 910.420.8104 phillip.giles@us.qbe.com QBE and the links logo are registered service marks of QBE Insurance Group Limited. Coverages underwritten by member companies of QBE. © 2014 QBE Holdings, Inc.