Day: October 11, 2010

Brownsville Independent School District VS HealthSmart

An article in the Brownsville Herald dated 9/4/2010, titled “BISD takes HealthSmart to court over employee health plan costs,” Trustee Ruben Cortez (Member- Nov 2006) and Trustee Rick Zayas (Member- November 2008) were quick to come to conclusions.

“The increase (in cost)  was so vast that you had to either be ignorant or purposely not paying attention to not notice that something was obviously wrong,” Zayas said.  Mr. Zayas had been acting as a Plan Fiduciary during the later part of HealthSmart’s tenure.

Plan Fiduciaries have a duty to be responsible stewards of the BISD’s Plan’s assets, jointly funded by employees and the district, i.e. taxpayers.  Mr. Zayas, albeit belatedly, appears to be exercising his duties for the first time.

Basic questions need answers; who was monitoring the program during the Healthsmart tenure? Who reviewed and approved the HealthSmart contract prior to the Plan’s effective date? Were the monthly HealthSmart billings audited? Or did BISD pay bills without question?  Were the HealthSmart billings compared to their proposal offer during the process to gain the business, and was it compared to the contract approved by the Board of Trustees?  Were the Plan Fiduciaries acting in the best interests of the Plan or were they negligent in their duties?

The Brownsville Herald article noted “HealthSmart was overcharging the district approximately $15,000 per month for disease management. The contract called for a fee of $2.49 per diseased member. HealthSmart was charging the fee for each of BISD’s approximately 7,700 employees. BISD’s insurance consultant discovered the discrepancy, which CTI confirmed.”

Yet, a careful review shows that this “overcharge” may not have been an overcharge at all. In a report dated November 24, 2008, for the period of October 1, 2007 – September 30, 2008, prepared by HealthSmart (formerly known as American Administrative Group (AAG), titled “Total Cost Breakdown” the figures shown for UR, LCM, DM are as follows:  

Month Amount Employee AVERAGE
Oct-07 $39,807 7058 $5.64
Nov-07 $39,880 7071 $5.64
Dec-07 $40,309 7147 $5.64
Jan-08 $40,585 7196 $5.64
Feb-08 $41,618 7379 $5.64
Mar-08 $41,959 7375 $5.69
Apr-08 $41,629 7381 $5.64
May-08 $41,725 7398 $5.64
Jun-08 $41,759 7404 $5.64
Jul-08 $41,838 7418 $5.64
Aug-08 $42,131 7470 $5.64
Sep-08 $42,960 7617 $5.64

 If the so called “overcharge” of $2.49 is accurate, then why did the BISD not catch this significant financial billing error?

A review of RFP # 09-150, Request for Proposal for Third Party Administration (TPA)-Services for the Self-Insured Group Health Plan and Stop-Loss Insurance included a breakdown of fees for TPA services being provided by HealthSmart.  

Utilization Review (UR) – $2.15 PEPM   

Large Case Management (LCM) – $1.00 PEPM

Disease Manage (DM) – $2.49 PEPM

Total – $5.64 PEPM

“PEPM” stands for Per Employee Per Month.

Mr. Cortez was quoted in the article “We’re going after them to get out money back.”  Unfortunately Mr. Cortez may have not done a thorough job on his homework here.   He appears to be basing his comment on the HealthSmart contract which shows the disease management monthly charge as “per diseased member.” However, this is an obvious clerical error no one discovered for years.

Disease management fees are routinely charged on a PEPM basis as a standard industry practice.

The article cited a quote from the BISD outside auditor who wrote “ HealthSmart “engaged in gross deviations from accepted industry customs and practices by renegotiating discounts with the PPO and charging an access fee in addition to a 30 percent fee of the ‘savings’ on a claim-by-claim basis, … essentially dealing beneath its corporate umbrella and basically paying itself twice at the expense of BISD.”  This statement may tend to lead the reader into believing that something illegal or out of the ordinary occurred during the HealthSmart tenure. One must be careful in forming opinions that may have no basis in fact.  A careful review of the audit and the HealthSmart Administration Agreement may bring answers that would preclude a lawsuit loss before a jury.

The audit report stated HealthSmart reported that 3% of paid claims totaling $906,876 were classified as “Out-of-Network” claims.  

Non-PPO Paid Claims
Billed Charges $  3,489,504.00
Ineligibles $ (2,017,028.00)
Co-Payments $        (3,350.00)
Deductible $    (327,579.00)
Co-Insurance $    (234,528.00)
PPO Savings $           (147.00)
Paid $      906,872.00

 Outlined in the recently issued audit report, which this lawsuit is based, BISD wrote checks in the amount of $558,334 (2007-2008) made payable to HealthSmart for Out-of-Network and Network claims negotiations.   Month after month, it appears that checks were written for services without any type of internal audit or reconciliation or review of the contract. An additional amount of $641,421 was paid during the 2008-2009 contract year for a total of $1,199,775 over a two year period.    

 Not included in the Brownsville Herald article, but mentioned in the recently released audit was an “untouchable” 66.5% discount off billed charges offered by HealthSmart.   Could it be that when something is discounted by 66.5% it is because the original price is too high to begin with?   Rising health care costs along with better discounts seems paradoxical.  The audit states that for every 1% loss in discount, there is a loss of savings in the amount of $700,000 to the district.  Is this statement supportable?   

 “I feel proud that we held strong to our convictions to get rid of HealthSmart. Now it is projected that BISD will save $7 million in its first year with MAA.”   Zayas said.   Actually, the “claim savings” will be much higher than this, approximately $10 to $15 million. That is due to claim lag. During the first three months of the current Plan, little or no claims are incurred and paid. A 90 day claim lag is normal.  To characterize claim lag as a Plan savings would be misinformed.

There is no question that medical claims for the BISD self-funded health plan are increasing. Could that be due to local health care providers charging more? And, do area medical care providers agree to take less money from one PPO network than another?  These are questions that need to be addressed with facts and not opinions.

 The Brownsville Independent School District, with a budget approaching half a billion dollars, would do well to hire a full-time risk manager. An experienced in-house risk manager would have provided sound guidance for the BISD and thus prevented an expensive and time consuming lawsuit. That alone would have paid for his salary and that of his staff.

 It appears that the Brownsville Independent School District’s self-funded employee welfare plan has been without proper oversight and sound plan management.

 The BISD lawsuit against HealthSmart is going to answer a lot of these questions, and more. Politics should have no play in the courtroom.

Goal of Underwriting Stop Loss – Drain Value, Avoid Claims

Stop Loss Start Over

Richard Burd

Feb 9, 2010

Stop Loss Start Over

Group purchase consortiums provide an excellent way for mid-sized employers to self-fund their medical benefit plans.  However, the traditional stop loss market is not a very good fit to execute this strategy.  To be successful with managing the self-funded risk within a consortium, a different approach can be more effective and low cost.

Traditional stop loss is an insurance vehicle driven primarily by underwriting skills.  The primary goals are to “select risk” and tightly manage loss levels to the carrier’s goals.  An alternative view, more suited to group purchasing consortiums, is to structure stop loss as a financing vehicle driven primarily by actuarial considerations of fair price, appropriate, spread of risk, and efficiencies of scale.

Misaligned Interests

The stop loss insurance business is an underwriter’s game.  Their game plan is to avoid paying claims.  They screen each prospect with claim review and disclosure requirements, and reject or rate-up anyone who may actually present a claim.  The higher the deductible, the more effective this process, hence the bias to drive deductibles higher and higher.  The carriers who have done best in this business have been the ones with average higher deductibles for this reason.

Backing up the underwriters is a team of contract and claim experts whose job is to swat down as many in-coming claims as possible.  These are the “free safeties” of the stop loss business.  Their job is to scrutinize each claim for errors in disclosure, honest or otherwise, and look for matches to an array of contract exclusions that are generally more restrictive than the typical self-funded plan document.

The effect of underwriting in stop loss is to drain the value out of the policy for the policyholder.  There are two ways to do this:

  1. Sell policies to employers who don’t need it.  This is known in industry parlance as a “clean risk”.
  2. If number one fails, the next weapon is coverage gaps and claim denials.  Industry parlance is “tight contract” and “claim audit”.

The success of aggregate stop loss insurance is similarly based on aggressive claim control.  Good underwriters place the attachment at a level unlikely to breach.  Experience has shown a 25% corridor, if properly placed, generally satisfies this requirement.  The successful loss ratio for a savvy underwriter is zero.

The problems of deductible escalation, lasers, coverage gaps, or quote declinations hit mid-size employers especially hard.  (Larger employers do well with higher deductibles and thin coverage, if indeed they need any coverage at all.)

The result of all this is to place a double whammy on the hapless small to mid-sized self-funded employer who not only faces the prospect of accepting normal insurance fluctuation risk, but also the uncertainty of failed insurance when they need it most.

Who’s to blame here?  Actually, it’s the buyer, if anyone.  Employers and their brokers simply buy the cheapest price without any regard for understanding and managing risk or considering the global picture.  It’s the stop loss carriers who have no choice but to meet market demand and assemble the team of claim avoidance experts in order to deliver the cheap price the employers demand to see on the spread sheet of pricing options.

None of this is meant to malign underwriting or the insurance carriers.  Underwriting is a tough, highly skilled job, and stop loss insurance is an honest business carried out by people who work hard to provide value for the slim premiums the marketplace allows.  Nonetheless, the reality is that thin prices and thin coverage create instability and poor risk management dynamics for employers choosing to self-fund and subvert the purpose of the consortium concept.

A Successful Model

Group consortium purchasing presents an opportunity for mid-sized employers to aggregate together, design a new model that eliminates the perils of self-funding, and welcome stop loss carriers as a partner, not an adversary.  Replacing the underwriting model with an actuarial model can produce a system that aligns the incentives between buyer and seller and creates safety for each party.

An important observation to make is that underwriters and their team of free safeties generally do not avoid claims, but rather re-direct who pays the claims.  They may shove the claim back to the employer who has limited resources to pay the claim.  Employers sometimes shove the claim to their administrator if it was their mistake that led to the denial; even worse, to the participant with the least amount of resources who failed to follow the managed care protocols.  If the underwriter assesses high rates at renewal to avoid the claim, the employer may flee to the high cost fully insured market but will inevitably pay for the claim through insurance premiums.

All this activity generates a lot of cost but doesn’t really take any money out of the system – it’s just a game of hot potato to see who gets stuck with the claim.

A successful group purchase program has the opportunity to re-write the rules.  Employers who come together in a consortium can mutually agree to share the risk of shock claims that are covered by their plan documents using stop loss insurance without the holes.  Deductible levels can be set actuarially at an appropriate level (probably lower than the stop loss carriers would prefer) to share risk and suppress fluctuations.

With an agreement to share risk at actuarially determined deductibles, financed through stop loss premium, there is no need for disclosure, lasers, coverage gaps, and punitive renewals since these mechanisms simply re-direct which employer gets stuck with the claim and don’t really save money from the system.  The underwriting function is reduced to preventing anti-selection by any employer wanting to join the consortium.

Similarly, on the aggregate side, a cluster of employers can aggregate for the purpose of sharing aggregate risk and place attachment points at a level that actually have some meaning.  That is to say, place attachment points that will cap the self-funded aggregate claims each year for some members of the pool that experience the occasional high claim year.

The role of the actuary in the new model is to enhance value for both the buyer and the seller.  For the buyer (employer), the actuary must design appropriate risk share mechanisms and attachment points that produce predictability, stability, and fairness across the employers participating in the group purchase.  Fairness arises from careful analysis and balancing of the risk each employer presents to the consortium pool. 

For the carrier, an accurate estimate of insured risk and adequate pricing, over time, insures that fair but modest profit goals are being met for the carrier.

This system is actually cheaper since it eliminates the overhead and administrative complexity of underwriting, disclosure, claim denials and audits, law suits, constant shopping, and flights in and out of fully insured programs.  The overhead costs of the underwriting and claim review juggernaut is thus replaced by actuarial guidance at a lower cost.  The claim burden for the system remains the same but is now appropriately spread over a larger base without lasers, denials, rejections, or inappropriately high deductibles.  Further savings are achieved from volume discounts for both stop loss coverage and service vendors.

This system is more efficient as it enables employers to create a stable platform that unlocks the savings of self-funding but eliminates the array of hazards that cause some self-funded programs to incur large losses and flee back to full insurance at a high cost.

Employer Commitment

Employers have to realize cheap stop loss premiums result from high deductibles and thin coverage.  The cheaper the stop loss, the more the carrier is compelled to seek ways not to pay claims, that is to say, tough underwriting and claim review.  The claims not paid by the carrier are usually paid by the employer, or worse, the participant.

Employers willing to seek a stable sustainable program will acknowledge there are a certain number of claims that will occur as a result of providing employee health coverage.  These claims are going to be financed by somebody.  They have a choice of traditional stop loss with all the inherent instability and uncertainty, or else they can agree, with their consortium partners, to jointly finance the shock claims across the consortium with fairness, spread of risk, and year-to-year stability.  Having agreed to finance these claims in a different fashion, the final step is to find a carrier partner with sufficient capital to provide a bigger pool of money to absorb shocks and take the transfer of risk at a fair price.

Richard Burd, FSA, MAAA
Executive Vice President
The Benecon Group
Leola, PA

Mr. Burd is a practicing actuary specializing in designing group medical risk share mechanisms and placing stop loss coverage for consortiums of employers, both public and private.  Benecon manages ten group purchase consortiums across two states covering about 20,000 employees.

Richard H. Burd, FSA, MAAA
The Benecon Group
Executive Vice President – Actuarial Division

Mr. Burd has over 30 years of actuarial experience working with group medical plans and other employee benefit programs.  Prior to joining The Benecon Group in 2001, he was Vice President and Corporate Actuary for Educators Mutual Life Insurance Company in Lancaster, Pennsylvania.

Mr. Burd’s expertise is in the area of group insurance programs, both fully insured and self funded, including pricing models, underwriting, trend analysis, claim modeling and projections, demographics, and credibility and statistical concepts.  He is a Fellow of the Society of Actuaries (FSA) and a Member of the American Academy of Actuaries (MAAA).

The Benecon Group specializes in managing municipal purchasing cooperatives and private sector cooperative for an array of industries.  Risk management strategies are designed and structured by the staff of the Actuarial Division.  Benecon currently manages ten separate purchasing co-ops representing about 200 employers and over 20,000 employees in two states

Editor’s Note: Retain, Share and Transfer make up the components of a captive. Retain predictible risk, share mid-level risk, and transfer all catastrophic risk.