TRS ActiveCare Announces New Premium / Benefit Changes

TRS ActiveCare Board of Trustees have approved rates and benefits for the 2010-11 Plan Year. This program provides health care benefits for Texas School District employees and is administered by Blue Cross & Blue Shield.

Rates are to be increased approximately 7%. There are minor benefit changes to be implemented.

Of interest is the payment methodology to be changed for “Allowable Amount for non-contracted provider services”. Currently that method is “determined by Blue Cross & Blue Shield of Texas”. Under the new Plan Year benefits, non-contracted providers (non-PPO) will be reimbursed at “50% of the non-contracted provider’s billed charges.”

Does this mean if Dr. Smith bills $1000 and Dr. Jones bills $1,200 for the same service, does Dr. Jones will get more for his work than Dr. Smith gets?

The Truth (As We See It) About the Blue’s PPO Discounts

It is hard to cope with the dynamo known as Blues. Who is going to tell them what to do when they have about a 30% market share in Illinois with no competitor even close to that number? The “caring card” carries considerable weight with employees who equate it with security and the heavy advertising for the health plan that says they care. Employers have been known to be too scared to change away from the Blues, due to the perception on the part of employees, that there is no better coverage. The advertising that they do by sponsoring what seems to be every home run or first down in Chicago sports is effective. This will tell at least in part, how they can afford to pay for it, when most other insurance carriers can’t.

By the way, this article is not being written because we won’t do business with the Blues or because we see them as the only carrier with faults. However, over the years we’ve gotten tired of hearing the misconceptions and deceptions about what is being offered and how and why they are able to make some of the offers that they do. Suffice it to say that knowing how certain carriers operate can protect an employer from making a choice that can later make it difficult to move on to another vendor. For instance, knowing that the Blues continually only provide claim data that is outdated, helps one prepare for the fact that leaving the carrier will be difficult at best. If you would like us to provide an analysis of your current situation and an underwriting evaluation of where you stand, please feel free to contact us at mail@ssbenefits.net .

The Question is- Is what you see, what you get?

When receiving a group medical insurance proposal from the Blues, they can claim to have better discounts than the rest of the competing offers (be it a self-funded or fully insured plan) and their pricing to get the business will surely reflect substantial discounts. But now what? Will you as the client ever actually receive the full value of their hospital contracts or physician discounts? Most likely not. Will your broker or consultant advise you of the same? Most likely not. Many broker/consultants don’t have a clue how to experience underwrite and have even less of a clue as to how these plans really operate.

The Principles of Deception

Let’s look at a few things. Back in the mid-1980’s competition was stiff. There were a lot more insurance carriers. The TPA business was getting off the ground. HMOs were popping up in people’s garages, and PPOs were being added to indemnity plans. Managed Care was booming. What were the Blues doing? Offering proposals that included “negative retention!” (For those of you who don’t know, retention is the fancy word for expenses to run an insurance program.) Brokers were actually telling clients (and competitors quoting against the Blues) that the Blues could operate programs with less than zero expenses! You’d think there was enough common sense in the business to think something fishy was going on, but that is not always the case. There’s nothing like a juicy override agreement to override common sense.

So, how do they do that?

The answer is, they don’t. The Blues were ingenious enough to know the market was changing and they had the advantage. The advantage was their relationship with the hospitals and doctors. They had the original PPO, except nobody knew it other than them.

Let’s concentrate on the hospitals. The Blues provide an annuity to every hospital in their network. They have most hospitals in their network. Some would say every hospital in the Western Hemisphere . The hospitals depend on this “annuity” since the Blues are the dominant player in Illinois . (That’s not to say this isn’t or wasn’t happening in other states). The Blues reimburse all hospital claims to the hospitals at Cost, Plus roughly 5% profit.

Let’s say the hospital charges are $10,000, but the cost is really $7,000. Cost plus 5% is $7,350. The Blues pay $7,350 to the hospital and keep the $2,650 profit. By keeping the difference, but charging the client as though the claim was for $10,000, the Blues could claim that there was no retention due to the profit they were taking (but charging as a claim to the client). The claim report to the client shows the $10,000 in hospital charges. (By the way, do you think the employee paid coinsurance on $7,350 or $10,000?)

Well, you say, what about PPOs?

Surely things are different there. Well, yes and no. The hospital accounting still is applicable, but new items have been added. The Blues have had to give up some of their profits in order to compete with other PPO plans, but they have still found a way to keep more than most. Negative retention had to give way and eventually disappeared, once they had to give up some money and show some PPO discounts.

Access Fees you will not believe

One of their brilliant ideas that most don’t catch is that they charge for access to their PPOs as a claim charge rather than identifying a per employee fixed monthly fee (we can’t recall if they had this idea first or stole it from First Health/Affordable).

Their charge for accessing the PPO can amount to as high as 28% of projected net paid claims (including non-PPO claims). On one case reviewed, that charge amounted to $31.11 per employee per month (and this was before the pooling and risk charges were added and the whole amount was divided by the objective loss ratio to make the charge even higher). That is far higher than the usual $3 to $6 per head that most independent PPOs charge.

But that’s OK, the discounts are greater with the Blues, aren’t they?

Maybe the Blues discounts are greater, but we will never know. Unlike (most, but not all) other carriers and third party administration arrangements, the Blues never show their actual discounts.

When we underwrite and review network performance, we usually like to separate billed charges on an In and Out of Network basis. Then we remove ineligible charges from the amounts billed In Network and see what the discounts were compared to actual eligible In Network charges. This gives a more true picture of the discounts achieved.

The Blues only provide their discounts on renewal as projected savings. You never get to see what the real number was! The number initially looks pretty good at 35% to 42% of projected paid claims. But, if you look at other networks with good coverage, as a percentage of actual paid claims, the discounts are usually much higher (50% to 55% of actual paid claims), with access charges that are far less. Remember, most other networks report their actual discounts too, so you actually know what you are getting for your access charge. So, the Blues might have better discounts, but chances are that you, the employer, may never benefit any more than you would with another network. In fact, you may end up paying more.

There are other tricks that are used by companies to overcharge for network access or overstate their discounts. You can review on this web site another article on that subject in THE TRUTH section of the web site.

What about that National Network?

Yes, there is a thing called the Blue Card network that can make sure that you have the opportunity to be in network on a national basis or cover your employees in other states. Just be aware of a few things. Those other state plans get the claim first and then process the claims with the local Blues. It is not a seamless proprietary network. Each Blues plan wants their piece of that discount pie. The delays can also be a bone of contention, since the delay can cause duplicate bills. If the Blues charge for access to the network as a percentage of network savings (as they have been known to do), how do you know you aren’t being charged for savings on duplicate charges due to delayed payment?

Underwriting

Needless to say, with the discount game being played, there is lots of room in underwriting to price for the competition. They may have to give up something in the rates on the front end, but the profits will most likely be there. The Blues also like to give claim experience that is six months old as part of their renewal. This makes it especially difficult for other carriers to underwrite, since the usual standard is to have claims experience that comes to within at least three months (and preferably two) of the proposed effective date. This helps the Blues to insure that you will receive higher than normal quotes from the competition. Underwriters from other carriers view Blues experience with trepidation, since the discounts are unknown and the experience is old. This forces the competing underwriter to be conservative in their assumptions.

The Blues (unfortunately now other carriers are following this poor example) also won’t provide experience on groups of less than 150 employees, although they want that experience if the group is over 100 lives and you want them to quote. Makes sense? You’ll also have to cite federal law and fight with them a bit to get Schedule A information for a group of less than 150, even though the IRS demands the information for a group of over 100 employees.

What the Blues have been able to do is successfully continue to market their market dominance by appealing to those who fear they may not have the same coverage elsewhere. For employers, the fear of employee reprisal and discontent is often enough to get them to accept some pricing tactics that they would not accept from other insurance carriers or third party administrators. Those brokers who continuously push the Blues are easily motivated to do so by override agreements to commission arrangements that Eliot Spitzer has no need to challenge, since they are not in his state. The weak and continually changing insurance commissioners in Illinois are not about to challenge the Blues and their tactics either.

Editor’s Note: This is a Classic, written several years ago by Jeff Seiler, an Illinois based insurance consultant. For additional reading, go to his website www.ssbenefits.net and read an update recently posted that “proves” , in the eyes of some, his theories.

“The Group Captive Meets Medical Expense”

Michael A. Schroeder

Jan 4, 2010

“The Group Captive Meets Medical Expense”

Introduction

Health Care Reform is debated in every news outlet, every day. Ideas for a government plan option stir debate along with other wide ranging suggestions on how to stop the runaway cost of health care. Wellness programs, drug and treatment delivery methods along with coverage availability each claim to be the solution.  Reducing cost or at least slowing the annual increase in the cost of medical care is the objective. How this objective is achieved is where the conflict arises.

Not surprisingly, the answer lies in a solution that brings together the best of each idea. This article focuses on a delivery method for insurance coverage known as a Group Captive. One of the most attractive features of a Group Captive is it provides the ideal insurance platform to deploy many of the cost saving ideas being discussed in the health care reform debate. The “skin in the game” structure of a Group Captive encourages the stakeholders to seek innovative cost saving ideas. In fact, the wellness programs, Rx delivery methods and coverage strategies we hear about as the latest innovation of today have all been tested by self insureds; not surprising when one considers who directly benefits when a medical expense saving is achieved.

What is a Captive?

A Captive is an insurance company that is owned and/or controlled by the insureds. Captives had their start in the 1960’s as a solution for insurance coverages that were not readily available in the standard insurance marketplace. Over the last fifty years, Captive’s have evolved from covering the uninsurable risks of a Fortune 500 Company to insuring everyday exposures like Workers Compensation and Auto Liability of groups and associations. It is the application of this group ownership approach to medical expense coverage that creates the Medical Expense Group Captive opportunity.

Like other Group Captive’s, the Medical Expense Group Captive is owned and/or beneficially controlled by the group member insureds. Similar to other Group Captive members or participants, Medical Expense Group Captive participants are commonly homogenous in their business pursuits. An example of groups that have successfully implemented Group Captive strategies in the property & casualty marketplace include physicians, trucking companies, contractors and accountants. In all cases, the homogenous group agrees to band together and share a certain portion of the risk that is common in all of their businesses. The objective of moderating and reducing the cost of insuring their risk is realized when the group’s risk management strategies reduce losses both before and after they happen.

How Does It Work?

Like standard insurance for medical expenses, a Group Captive program requires infrastructure for the effective delivery of claim payments, including a claims administration or TPA company, an insurer to issue the policies and a reinsurer to cover the large or unforeseen loss events. The Group Captive Program then adds a Captive facility that is controlled by the group to assume a portion of the risk that is typically retained by the insurer. See below the organizational diagram of a Group Captive.

The formation of the Captive facility historically caused the Captive solution to be one limited to larger organizations that could afford the time and upfront investment in actuarial, legal and regulatory professionals. Fortunately, the innovation of the segregated account rent-a-captive facility enables the middle market to access the benefits of a Captive solution. These segregated account Captive facilities enable an insured or group of insureds to efficiently form a Captive that can serve as the risk assumption entity for the Group Captive Program. This Group Captive entity is functional in weeks with no upfront investment in professional expenses or surplus.

Once the Captive facility is formed and the program’s service providers are engaged, the Group Captive members purchase insurance the same way they do in the standard market; they send in their underwriting information, receive a quote and bind coverage. The execution of a contract with the Group Captive facility that is commonly referred to as a participation agreement follows along with a contribution of collateral before the insurer issues the medical expense policy coverage.

The Group Captive then functions like any other insurance company and reports to its owners its financial performance with premium earnings, loss payments, expenses and investment performance activity. Through retaining risk in the Captive and the application of innovative program services designed to prevent and reduce medical expenses, the Group Captive members may experience underwriting outcomes for their Captive reinsurer that enable a return of underwriting and investment income. Without the Captive participation by the insured members, these positive underwriting outcomes would have inured to the benefit of the insurance company alone.  The return of underwriting and investment income obviously reduces the insured members cost of insuring their medical expenses and offers a cost advantage over traditional medical expense insurance coverage.

Why Does It Work?

A Group Captive delivers better results to participating members for several reasons. First, by retaining risk in the Captive facility, the insured members are able to capture a portion of the underwriting and investment income a traditional insurance company typically retains. The profit and overhead component of the standard insurance transaction can be anywhere from ten to thirty percent of the premium dollar paid by an insured. When these profit and overhead dollars are captured by the insured members, their overall cost of medical expense insurance is reduced.

Group Captive members also realize results that surpass their traditional insurance experience because of the shared incentive the members have with each other and the other risk takers. Unlike the traditional insurance transaction where you pay your premium and losses are largely irrelevant to you, when a Group Captive member contributes capital to a risk bearing enterprise that is dependent on the Group’s loss experience, the incentive is for the member to police its claim activity more diligently. This is the “Skin in the Game” concept.  Reduced expenses such as reinsurance are also realized by the Group Captive members who exhibit claim experience more attractive than the overall medical expense insurance marketplace. Shared incentives create shared expense benefits.

Of course, the environment of loss prevention is also stimulated as the Group Captive members search for the most efficient way to deliver Rx, purchase medical procedures and deliver wellness ideas or practices. It is not surprising that many of the best in class health care solutions being advocated by the experts in the national debate have their origin in the Captive or self insurance marketplace. When a new method to mitigate the health risk of patients can be correlated to a premium dollar savings, it is not surprising the members of Group Captives have a higher commitment level to better health outcomes than the typical insurance buyer. Creativity, commitment, oversight and consistency all contribute to the Group Captive offering the best overall price and solution to escalating medical expense costs.

What Can Go Wrong?

The devil is in the details. The benefits a Medical Expense Group Captive offers can be lost when details such as provider networks, excess reinsurance terms, transaction fees and wellness programs are ignored or mishandled. Should the Group Captive also not utilize the efficiencies offered by established turnkey Captive facilities, the organizational costs required to establish a regulatory adequate Captive facility can take years to recover. Experimenting with a new wellness program can deliver returns with little downside, but trying a new service provider without the knowledge and experience with reinsurance treaties and underwriting could contribute to increased costs for the Group Captive members.

Conclusion

A Group Captive approach to insuring your medical expense risk is one of the many strategies available to confront escalating medical costs head on. Take control by not only improving your approach to how health care is delivered to your organization, but how the insurance dollar is spent and returned. When the best possible cost containment services are combined with an efficiently built risk retention facility, the conclusion that a Medical Expense Group Captive offers the lowest cost solution for insuring your health care is evident.

Bio:

Who is Roundstone?

Roundstone Management, Ltd. (“Roundstone”) based in Westlake, Ohio is an insurance organization focused on the development, underwriting and servicing of alternative risk products, including captives, rent-a-captives and specialty insurance programs. Roundstone offers intermediaries and buyers an expertise in the captive marketplace with an unbundled services approach utilizing the facilities of Roundstone Insurance, Ltd., a class III Bermuda reinsurer registered as a segregated account company.

Michael A. Schroeder is President of the Roundstone organization. Mike offers twenty years of insurance industry management experience with responsibilities in the captive market, self insurance pools and trusts, publicly held insurance companies and the regulatory environment.

Prior to joining Roundstone, Mike served as National Interstate Corporation’s (NASDAQ: NATL) Vice President and General Counsel during the Company’s transition from a closely held mono-line insurer to a NASDAQ listed fifty state AM Best A rated insurance holding company. While at NATL, Mike developed numerous alternative risk structures, including group captives, single parent captives and purchasing groups.

Prior to his position at NATL, Mike provided restructuring and transactional consultation services to firms in the insurance industry, held senior level executive positions with a publicly held worker’s compensation insurer, a non-standard auto insurer and served as an associate in the insurance defense department of a Cleveland law firm.


Mr. Schroeder received his Juris Doctorate from The Ohio State University College of
Law, and received his Bachelor of Science degree in Business Management from Tulane University.
Bermuda

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