Lecture 15Alternative Funding Methods

• Alternative to What?

• Reasons for Alternative Funding Methods

• General Categories– Modify traditional contracts– Partial or total self-funding

Reasons for Alternative Funding Methods

• Cost savings– Avoid mandated benefit provisions

• Example - infertility treatments– Lower premium taxes– Reduce additional expenses

• Commissions• General overhead• Risk charges

• Improved cash flow– Keep cash longer– Higher investment returns

• Tax considerations

Plans that Modify Traditional Fully Insured Group Contracts

• Premium-delay arrangements– Extend grace period

• Reserve-reduction arrangements– Premium payments in line with claim payments– Limit-liability arrangement

• Long term disability

• Purchase coverage 1 year at a time

• Insurer not responsible for claims if premium not paid

Plans that Modify Traditional Fully Insured Group Contracts - (cont.)

• Minimum premium plans– Aim to reduce state premium taxes– California ruling prohibits this tax avoidance– Employer

• assumes responsibility for the first 80-90% of expected claims• Hires insurance company to act as agent • Purchases insurance for excess payments

• Cost-plus arrangements (or flexible funding)– Premium equals prior claims plus loading– Better experience yields cost savings

• Retrospective-rating arrangements– Premium based on claims experience during contract period

Self-Funding Plans• Total self-funding

– Desirable characteristics of coverage• Predictable claims Noncontributory plan• Nonunion plan Claims handling ability• Ability of provide administrative services• Ability to obtain discounts from providers

– Typically applied to:• Short term disability Medical expense plans• Dental Vision• Prescription drugs Legal expenses

Self-Funding Plans - (cont.)

• Self-funding with stop loss and/or ASO– Stop loss coverage– Administrative Services Only contracts

• Funding through a 501(c) (9) Trust– Voluntary Employees’ Beneficiary

Associations (VEBAs)– Allows tax deduction for funding– Benefits for:

• Death Medical expenses• Disability Unemployment