Self-Insured COBRA Premium, Redux

[Christine Roberts]

Just to confirm, it is NOT an acceptable shortcut around COBRA regulations re: deriving premiums for a self-insured plan, for the plan to get a COBRA premium quote from an insurer applicable to plans of comparable size/claims experience?

I have a client whose ins. broker is insisting that this is a widely-accepted methodology.

[Sandra Pearce]

We use previous claims experience and other data available from our broker and our reinsurer to calculate premium.

[KIP KRAUS]

Actuarially equivalency rates are an acceptable way of determining COBRA premiums for a self-insured plan. It is also an acceptable method of determining the percentage of the medical plan cost employees will pay.

While all of the elements of a fully-insured plan are not present in a self-insured plan the underwriting assumptions don’t change, i.e. claims are claims; admin. Is admin.; reserves are still booked; stop-loss premiums are still paid, medical trend is still applied, and total costs are projected.

Having said this, I would argue that these rates should be based on the employer’s own plan and not the comparable plan of another employer. If such rates can’t be determined on the employer’s own plan then the suggested COBRA alternative method should be used. Does Congress and the DOL know how to underwrite group medical plans? This is just a rhetorical question.

[Larry M]

I agree with Kip's comments (as usual), but am concerned about the implication a self funded plan does not know its own costs, or doesn't want to know.

[GBurns]

Larry,

For this year I am now over 50 companies that have no idea of what their self-funded plan cost is or how to impute or calculate a monthly per employee rate etc. These 50 include Fortune 100 and 1000 companies.

It is a real cause for concern.

[KIP KRAUS]

G:

How can a fortune 100 or 1000 company not know what their paid claims are? How can they not know what their TPA claims expenses are? Even if they are processing their own claims and don’t use a TPA they should be able to figure out their admin. cost. If they have stop loss insurance they should know that cost. They should be able to, and in fact should be booking a reserve. All of these elements are part of figuring out a fully insured equivalent rate. How can they develop an employee benefit budget without knowing their medical plan costs?

Am I missing something here? Please enlighten us.

:confused:

[Christine Roberts]

In this case the employer is a medical care provider. All care is provided "in house" and tracking of claims/expenses is not as discrete a function as it would be for a different type of entity.

[GBurns]

It was very surprising to me. Some of them have referred the matter to outside consultants because they could not put together a decent rationalizable figure after 6 months or even months after closing their fiscal year.

Stop-loss premiums and other fees were partially paid as billed and partially paid with argued adjustments. They all thought that paying in 180 days was normal processing time. So they really did not have a handle on the issue.

Claims payment seemed to be largely an advance against the account. This is probably why you might read of hospitals etc having large accounts receivables.

As for budgeting they all seemed to have guessed and all accepted a deficit as normal.

I still cannot believe some of the reasoning that I got.

[Christine Roberts]

I have confirmed that the quote my client received from an insurer was based on three years of the client's own claims experience for employee/participants.

If I correctly understand Kip's first post, therefore, the quote should be acceptable as a basis for a self-insured COBRA premium.

[KIP KRAUS]

Christine:

If the entity is in fact a hospital I am not surprised that they don’t have a handle on their claims cost. I’ve never known of any hospital that has an accurate enough accounting system.

I’m not sure I would agree that having an insurer giving a premium rate related to another group would be acceptable, except that in the event that the plan was going into its first year without previous claims experience.

I think you may need to use the COBRA recommended alternative method in determining COBRA premiums.

I personally would not want to use the excuse in court that the entity doesn’t have a grasp on its claims experience, and total plan cost.

Does this make sense?

[Larry M]

This seems to be getting "worser and worser".

Let's see,a company is large enough to be able to self-fund its employees' medical care benefits.

So it gives some one a checkbook (including access to the bank account) and tells that person to pay the bills. However, it does not have the ability (or desire) to determine whether the bills are being paid correctly, nor does it have the ability to know how much has been paid and how much is owed and, by the way, since it has an unfunded medical plan, it is subject to audit - but don't worry because the auditor either is accepting the "I don't know"s from the person administering the claims...or else it tells the auditor to not bother because it doesn't even know how many persons are covered and may not be subject to audit.

If we didn't know better, we would believe the company falls into one of the following categories:

savings and loan

bank

hospital

medical group

trust company

medical management group

governmental agency

And, after all, how much could a medical plan cost? On average it may be only 10 to 15% of payroll - unless, of course, there are some major claims - but those are covered by reinsurance - which is "free".

I wonder if someone could refer those companies to me. To save both the client and me lots of time and money and headache, I would agree to

a. not provide any service; but

b. bill them for twenty hours a month at a heavily discounted rate.

The client could pay me at irregular intervals and not worry about having to reconcile the work done with the bills submitted. Think of all the time it's accounting department saves...and all the time it frees for me to provide services for other companies.

[Christine Roberts]

Kip, you stated:

"I’m not sure I would agree that having an insurer giving a premium rate related to another group would be acceptable, except that in the event that the plan was going into its first year without previous claims experience. "

Here, the insurer's quote was based on three years of the client's actual claims experience. Presuming we can confirm that the insurer's methodology was consistent with the COBRA regulations (e.g., the calculations took COLAs into account), hasn't the employer made a good faith effort to meet the regulations' requirements for self-insured COBRA premiums? Does it matter that the insurer, rather than the employer, did the calculations based on actual claims history?

[KIP KRAUS]

Christine:

I guess I must have misunderstood you. I didn’t know that the insurer used the actual claims experience of you client, the medical provider. If they were using this experience for the immediate past three years and projected it forward I would use the rates. In my opinion it should be the insurer (or some other expert) that makes the calculation if there is no one in house that knows how to do it.

How did they get the experience? Was your client fully-insured immediately prior to becoming self-insured? I need more information now, because every time I see a new post it seems there are different facts.

I would also suggest to the client that they figure a way to determine their experience in the future.

[Christine Roberts]

Kip, sorry for the confusion. The client had three years of claims (loss) data for individual participants. The data was divided into "soft" costs (i.e. medical care provided in-house) which was based on Medicare rates, and "hard" costs that required service by an outside provider.

Evidently they did not have claims data for dependents.

[KIP KRAUS]

Christine:

Sounds shaky to me. I personally wouldn’t feel comfortable basing a medical plan projection on that type of claims information unless, and I really would feel uncomfortable using such rates for COBRA rates.

I’m more confused now about how their plan operates. Some services are provided in-house and some are provided by outside venders, right? Who pays the outside venders, a TPA?

I wouldn’t want to be the subject of an audit using the insurer’s rates. Of course, they may have made some acceptable underwriting assumptions regarding the dependent claims. If they are willing to argue that their assumptions are reasonable and made in accordance with acceptable standards of medical underwriting methods you might get away with using them.

Just out of curiosity, what rates did they come up with and how many employees are covered? If you don’t want to post them here feel free to e-mail me.

[Larry M]

Christine, from your comments I understand the plan provides two types of benefits for the employees and their covered dependents.

For those medical care services which can be provided "in-house" by your provider(s), there was no specific bill rendered. Rather, services were provided.

For those services which could not or were not provided in house, the providers were reimbursed according to some reasonable and customary fee basis.

As a result, the determination of the "benefit costs" of the plan for employees was made using an assumed cost (based upon what would have been paid if Medicare rates had been billed) for the in house services and the actual benefit payments for out house seervices.

Using those numbers, and with sound actuarial techniques, the insurance company developed a rate per employee.

So far, this seems to be an acceptable/defensible (to me, at least) method of determinng the basic costs to use for developing COBRA rates.

The part which is troubling is your comment "..they did not have claims data for dependents."

Why not? Surely, whoever provided the service (in or out house) knew the identity of the patient and the relationship to the employee.

Is this because the number of employees with family members is not known? [An assumption can be made for the purposes of developing the COBRA rates.]

Is this a situation where it was too much trouble to separate claims between employee and dependent and all family members were given the same identity because the IBM card had only 80 spaces?

Or is this a situation where an individual, whether an employee or dependent is given a unique identity as a "member" and all costs are identified on a "per member per month" basis? Again, a reasonable assumption can be made as to the split between employee and dependent costs to develop COBRA rates.

Or have i missed the boat completely?