Employee Benefit Strategy

Adverse Selection Definition

- Created when the employees can reasonably predict the probability of a claim. Then only those whose claims would be greater than the cost of coverage would purchase coverage - Occurs when there is both the availability of choice and predictability of a claim

Steps to apply functional approach (12)

1) Classify employee needs into functional categories of common loss exposures (Medical, D, Death) 2) Classify who the employer wants to protect (dependents? retirees?) 3) Analyze current benefits 4) Determine any gaps or overlapping benefits 5) Consider recommendations for plan changes 6) Estimate cost/savings from each of recommendations 7) Evaluate alternative methods of financing or securing benefits 8) Consider other cost-saving techniques for both current and recommended benefits 9) Decide upon benefits, methods of financing, and sources of benefits 10) Implement changes 11) Communicate changes to employees 12) Periodically reevaluate benefit plan

Categories of persons the employer may want to or be required to provide benefits for (7)

1. Active full-time employees, & dependents 2. Retired former employees, & dependents 3. Disabled employees & dependents 4. Surviving dependents of deceased employee 5. Terminated employees & dependents 6. Employees on temporary leave of absence 7. Part-time employees

Reasons for using the functional approach for designing and evaluating employee benefits (5)

1. Benefits must be organized to be as effective as possible in meeting employee needs 2. Avoiding waste in benefits can be an important cost-control measure 3. Important to analyze where current benefits may overlap 4. Systematic approach is needed to keep benefits current, cost effective, and compliant w/ regulations 5. Systematic approach needed to ensure various benefits can be integrated with each other

Common functions for administering employee benefits (9)

1. Benefits plan design 2. Benefits plan delivery 3. Benefits policy formulation 4. Communications 5. Applying Technology 6. Cost management & resource controls a) Compare to competition b) Measure achievement of HR objectives c) Assess and manage program risks 7. Management reporting 8. Legal & regulatory compliance 9. Monitoring the external environment

Activities required for serving plan participants (5)

1. New employee benefits orientation 2. Policy clarification on eligibility, coverage, and applicability of plan provisions 3. Dealing with exceptional circumstances and unusual cases 4. Collection and processing of enrollment data, claims info, and request for plan distributions 5. Benefits counseling and response to employee inquiries - Active, Terminated, Retiring, disable, or on Leave employees

Reasons for the growth of employee benefit plans (6)

1. Business Reasons -good benefit plans help the employer attract and retain capable employees, and can improve employee morale and productivity 2. Collective Bargaining - the Taft-Hartley Act requires good-faith collective bargaining over conditions of employment 3. Favorable Tax Legislation - many plans are designed to maximize available tax benefits. 4. Efficiency of the Employee Benefits Approach -marketing of benefits through the employer is a cost-effective and administratively efficient distribution channel. 5. Wage Increase Limits - wage increase limits during World War II and the Korean War led to an expansion of employee benefits as a way in which employers could increase the employees' total compensation. 6. Legislation Actions - the government has encouraged employee benefit plans through various legislative actions

Considerations for analyzing cost-saving techniques

1. Changes in benefit design 2. Reduction of benefits 3. Flexible benefits 4. Managed care 5. Utilization review 6. Disability management 7. Wellness programs 8. Change insurers 9. Self-fund

Methods for comparing benefit programs to the competition (4)

1. Compare the benefits payable to representative employees under different circumstances 2. Compare actual costs to the employer for different benefit plans 3. Calculate relative values of the different benefits based on uniform actuarial methods and assumptions (Actuarial Value) 4. Compare benefit plans feature by feature to isolate specific provisions that may be appealing to certain employee groups

Reasons plans are outsourcing benefits administration (4)

1. Complexity of administering benefits 2. Efficiencies of specialized service providers 3. Abilities of specialized providers to obtain favorable pricing because of their business volume 4. Ability of service providers to more readily implement technology and monitor regulations and market trends

Employee Benefits Program - What influences complexity of program?

1. Comprehensiveness of the benefits design 2. EE Group Size 3. Program uniformity across different EE categories 4. EE geographic dispersion 5. Existence of self-funded or self-administered arrangements

Benefits that cannot be offered in a cafeteria plan

1. Contributions to medical savings accounts 2. Qualified scholarships & education assistance programs 3. Certain fringe benefits 4. Qualified LTC insurance 5. Athletic facilities 6. De minimis benefits 7. Dependent life insurance 8. Employee discounts 9. Lodging on the business premises 10. Meals 11. Moving expenses 12. No-additional cost services 13. Parking and mass transit 14. Contributions to a college savings account 15. Legal or financial assistance16. 403b plans

Factors that could make HDHPs more effective (5)

1. Cost transparency a) prices can be different based on network discounts b) many providers don't even know the costs c) claim costs may differ due to factors not known before procedure 2. Discussions between providers and patients particularly in: a) Value based care arrangements- Compensated based on quality & effectiveness b) "Reference based" plans- Target threshold dollar amount for services 3. Pre Funding HSAs at the beginning of the year 4. Allowing more first dollar coverage to curb the fear of members forgoing care 5. Lengthened consumerism: - allow more design, flexibility, allow a longer coinsurance period ( Lower deductible & higher OOP max)

Considerations for determining the employer's optimal defined-contribution amount for a private exchange (5)

1. Current funding approach - employer's current philosophy around subsidies 2. Variations by coverage tier - does employer want to subsidize dependents at a different level? 3. Member impact - how does this impact the member payroll contributions? 4. Financial Goals - does this change meet the employer's financial goals? 5. Competitive pressures - how does the subsidy compare to the benefits provided by other organizations that compete for similar talent

Steps to understand how benefit designs impact the company financials after merging two employer groups (5)

1. Determine "total cost rates", which represent the average expected cost PEPM paid by the plan a) These rates are also often referred to as premium equivalent rate b) The rates will vary by coverage tier ( EE only, EE + Spouse, Etc...) 2. Determine the enrollment distribution. -Use current enrollment by plan and coverage tier and make "migration" assumptions about which plans employees will choose once the merger is complete 3. Determine employee contributions 4. The "company subsidy" is the difference between the total cost rates and the employee contribution 5. The total company cost -is determined by cross-multiplying the company subsidy with the enrollment for each group of employees for whom the subsidy varies

Voluntary Benefits - Excluded from ERISA if 4 requirements are met

1. ER does not make any contributions 2. Participation in the program is completely voluntary 3. ERs sole functions with respect to program are: - Permit insurer to publicize program - Collect Premiums - Remit premiums to insurer 4. ER receives no consideration other than for administration services rendered

Common elements of private exchanges (5)

1. Employee choice - private exchanges often offer more plan design options than traditional employer-sponsored plans 2. Employer subsidies - the employer typically makes a defined contribution 3. Ancillary product offerings - products such as dental and vision are often offered alongside medical and pharmacy benefits 4. Online enrollment and decision-making tools - these tools allow members to evaluate their health care needs, understand their employer's subsidy, and elect benefits that meet their needs 5. Benefits administration - most private exchanges offer end-to-end benefits administration, including enrollment, eligibility, customer service, and billing

Requirements for Canadian health spending account reimbursements to be tax-free

1. Employee's election must be made in advance of the plan year and must be irrevocable. Exceptions for change in family status 2. Plan must require forfeiture of any unused balances a) One year rollover of unused balances b) One year rollover of unpaid claims

Technological tools used by benefits directors to support customer-driven processes (5)

1. Executive information systems - provide management information in summary format. Helps identify utilization patterns and cost factors 2. Imaging and optical storage - eliminates paper records and allows sharing of documents over a network 3. Access to information over the internet - facilitates paper-less communication from the plan sponsor to insurance carriers, investment custodians, and TPAs 4. Client-server technology - integrates networked applications with desktop and mobile tools, allowing decentralized management and supporting self-sufficient plan participants 5. Employee self-service - allows customer-driven benefits modeling, retirement planning, and updating of personal data

Advantages to the employer of offering flexible accounts (canada) (5)

1. Expand the types of benefits offered with little or no additional cost 2. Offer a benefit that might appeal only a small segment of the employee population 3. Contain costs -(set defined contribution), while providing employees with flexibility over how funds are spend 4. Test the appeal of flexible benefits without committing to a full-choice program

Categories of regulatory guidance that have been proposed to change HSAs (4)

1. Expansion of plans that can be paired with HSAs 2. Expansion of contributions made to HSAs 3. Expansion of major medical use of HSA funds to a broader variety of expenses 4. Expansion of non-major medical use of HSA funds

Different models and approaches of private exchanges

1. Fully Insured, Single Carrier - risk transfer but cost increase 2. Fully Insured, Multi-Carrier - Leveraged competition, best-in-class market efficiencies, EE choice, risk transfer - BUT, less control over plan design 3. Self- Insured, Single Carrier - Traditional mode 4. Self-Insured, Multi-Carrier - EE choice, best-in class efficiencies but less leverage over carriers

External factors that impact benefit management activities (6)

1. General business & competitive conditions - increasingly important for attracting & retaining employees 2. Governmental Policy - monitoring laws and regulations 3. Workforce demographic shifts - greater diversity has led to flexible benefit plan offerings 4. New product development - evaluate new products and integrate them into existing plan offerings 5. New organizational structures - redesign plans to fit new structures and remain compliant 6. Technological enhancement - proactively plan the introduction of new tech

Types of voluntary benefits

1. Group term life 2. Dependent life insurance 3. Supplemental life insurance 4. Long-term and/or short-term disability income insurance 5. Dental insurance 6. LTC coverage 7. Adoption assistance 8. Accidental death and dismemberment insurance 9. Automobile insurance 10. Homeowners insurance 11. Benefits under a legal services plan 12. Vision benefits coverage 13. Critical care insurance 14. Cancer insurance 15. Group homeowners and automobile insurance 16. Hospital indemnity insurance 17. Travel accident insurance 18. Student medical insurance

Make up of an HDHP

1. HDHP has a specific meaning under the IRS code to be accompanied with an HSA 2. Eligible plan has cost share limits with min. deductible ($1,350, 2019 non-preventative services) & max OOP ($6,750, 2019, in-network only) 3. Plan must have limited first dollar coverage - deductible must be met before any cost-sharing can be applied, exclusions for preventative care 4. Self only has embedded deductible, Family coverage has aggregate - no embedded individual deductible for each person, only accumulation of claims paying down the family deductible

Types of flexible accounts in Canada

1. Health Spending account (non taxable if requirements met) - may cover any health care expenses that would be tax deductible under the Income Tax Act, as long as they are not covered by the provincial plan or other private insurance 2. Personal Account (taxable) - may cover a wide range of benefits, at the employer's discretion, such as child care, financial counseling, or even sports equipment 3. Executive perquisite account - administered separately from the flexible plan

Factors that primarily drive HDHP cost savings (3)

1. Health of individuals selecting the plan 2. Utilization impact arising strictly from plan design and funding 3. Cost savings resulting from increased consumer engagement ** Note that HDHPs have not shown a clear ability to bend the cost curve beyond initial impact

Reasons Why Individual Market Trend Has Been Towards Leaner Plans (HDHPs) (4)

1. High cost of unsubsidized premiums 2. Premium tax credit leveraging 3. Tax, portability and ownership qualities of HSAs 4. Age curve compression

Options for spreading the cost of adverse selection

1. Load the prices of the lesser-valued options - reduces reward for opting down 2. Load the prices of the highest-valued options - may cause more employees to opt down 3. Spread the cost of the adverse selection over the price of all options

Common loss exposures covered by employee benefit plans

1. Medical expenses (active & retired) 2. Losses due to employee's disability 3. Losses due to death of active employees 4. Retirement needs 5. Capital accumulation 6. Needs arising from unemployment of temporary termination 7. Needs for financing counseling, retirement counseling 8. Losses from property & liability exposures 9. Needs for dependent care assistance 10. Needs for educational assistance for employees & dependents 11. Needs for LTC 12. Other employee benefits (such as incentive programs)

Key terms needed to discuss the Employer Shared Responsibility (ESR) (5)

1. Minimum Essential Coverage (MEC) - MEC plans cover all essential benefits, including hospitalization, outpatient and physician services, and rx drugs 2. Full-Time Employee (FTE) - any employee who works 30+ hours/week 3. "Affordable" Coverage - FTE required contribution for self-only coverage does not exceed 9.5% of their household income 4. Minimum actuarial value (AV) - plan must pay at least 60% of covered expenses 5. Federal or State Insurance Exchange - online marketplace where consumers may shop for qualified insurance coverage and request a federal subsidy

Sources of funds for health spending accounts

1. New contributions by the employer 2. Employer savings from reducing medical plan costs. 3. Employees directing employer-provided flexible credits to the account. 4. Employees allocating a part of annual bonuses or company savings plan matches to the account.

Situations where consumer engagement is less likely to have an impact even under an HDHP

1. Urgent care needs without time to engage in proactive consumer behavior 2. Individuals with higher cost chronic care needs are more likely to hit their OOP limit

Types of cafeteria plans in the US (3)

1. Premium conversion plans - there are no employer contributions. The plan is offered so that employees can pay for their employee-paid insurance costs on a tax-favored basis. 2. FSAs - these accounts are permitted for medical reimbursements, dependent care, & adoption 3. Full flex plans - participants can select from a wide range of benefits. The employer selects an amount to give for benefits, which is put towards the cafeteria plan or into an account

Important impacts of HDHPs

1. Probability that a market average risk member will exceed a given deductible- $1,350 & $3,000 deductible there is a 48% & 32% chance, respectively 2. As members have access to account funds to help pay for POS claims less than the deductible, it will erode the impact of the HDHP 3. Impact of account funding is likely to be on the lower side of the ranges if the employee owns the account (HSA), but on the higher side if the employer owns the account (HRA, FSA)

Examples of overarching philosophy, guiding principles, and objectives developed after merging two employer groups (8)

1. Provide tools and resources to encourage employees to become better healthcare consumers 2. Promote accountability for lifestyle and healthcare choices 3. Ensure affordable payroll contributions for lower paid workers 4. Minimize barriers to seeking appropriate healthcare which may be caused by high out-of-pocket costs 5. Utilize best-in-class and industry-leading solutions to maximize financial efficiency 6. Limit year over year volatility for employees a) Minimize increase in payroll contributions b) Minimize disruption of existing patient/provider relationships 7. Maximize financial efficiency by offering high performance networks 8. Optimize employee health and well-being and productivity through effective care coordination and healthy lifestyles programs

Pricing strategies for controlling adverse selection

1. Risk based pricing - price options in a way that reflects the expected cost of the benefit ( vary rates by age, gender, smoking) 2. Employer Subsidization - subsidize prices to encourage broad participation which will cause better spread of risk

Consumer choice and empowerment that is encouraged through the use of HDHPs (7)

1. Saving for health care services - account fund ownership encourages regular deposits 2. Selecting appropriate treatment venues - EX: Urgent care instead of ER 3. Avoiding unnecessary care and/or avoiding those treatments that have marginal benefit 4. Brand to Generic drug substitution 5. Comparing quality ratings of providers 6. Negotiating prices with providers, particularly for costs under the deductible 7. Improving own health & avoidance measures

Make up of an HSA (7)

1. Savings account is owned by the employee 2. Either an employer or an employee can contribute 3. Account can be used to pay the cost share of the HDHP & other qualifying expenses 4. Account contributions are exempt from personal income tax 5. Contributions are limited to as specific amount ($3,500 indiv, $7,000 family, 2019) 6. Account also acts like a tax advantaged retirement account since amounts can be invested and accumulate tax free 7. As long as funds in the HSA are used for eligible medical expenses, they remain tax-free at time of withdrawal

Challenges for small companies offering group medical plans (4)

1. Subject to state-mandated benefits (Fully insured) 2. Plans must be designed using options available in that area 3. May have to provide additional documentation so that insurers can verify the existence of the company 4. Most states do not allow companies to join forces to form larger purchasing pools in order to get group discounts

The elements of a data collection request to an employer in order to advise on Health & Welfare benefits (4)

1. Summary Plan Description - Employee eligibility, plan design details 2. Documents detailing costs of each benefit - Splitting out the employer & employee portions 3. Contacts for providers - medical, dental, vision, life - Enrollment data for various programs 4. Census file - demographic data ( Age, Gender, Salary, Service yrs.) - Plan election information

Considerations when setting employee contribution levels for an employer health plan (5)

1. Total compensation philosophy - how compensation is divided between salary and benefits. Some employers allocate more to benefits 2. Benefits Budget - many employer budgets are not keeping up with pace of increase in health care, increasing employee contributions 3. Benefit competitiveness - employers must consider the total benefit structure compared to other employers 4. Collective bargaining - Benefit coverage & payroll contributions may be negotiated by unions 5. Legislative and Regulatory Issues - new laws may cause employers to change benefits or contribution levels - ACA affordability threshold ( contributions cannot exceed 9.5% of household income) resulted in some employers reducing required contributions

Considerations for designing flexible accounts

1. Type of approach - decide whether to introduce a flexible account & which types of accounts to offer 2. How will the presence of the account impact other benefit choices? 3. Funding considerations - for example, decide if contributions to the accounts will be monthly or annually 4. Should there be limits on how much the employee can allocate to the flexible account? 5. How will mid-year changes be handled? - this will vary by account type & the reason for the change (family status change, termination, retirement, or death) 6. Disposition of funds at year end - funds are forfeited, rolled over, or (for personal or perquisite accounts) paid in cash

Considerations for analyzing current benefits in the employee benefit plan (7)

1. Types of Benefits 2. Levels of Benefits 3. Probationary periods 4. Eligibility requirements 5. Employee contribution amounts 6. Flexibility available to employees 7. Actual employee participation

Penalties that apply if the ACA enacted ESR rules are not met

1. US Code Section 4980H(a) a) Does not offer MEC to at least 95% of its FTEs and at least one FTE enrolls in an Exchange and receives a subsidy b) Penalty is $2,000 per year for each FTE (less 30) c) Penalties do not apply to employers with fewer than 50 FTE in the prior year 2. US Code section 4980H(b) a) Offers MEC for at least 95% of FTEs, but coverage is either "unaffordable" or does not provide MV (60% AV) b) Penalty is $3,000 per year for each FTE who enrolls in an exchange plan and receives federal subsidy.

Questions to ask in evaluating employee benefit plans (7)

1. What are the objectives of the employer and employee? 2. What benefits should be provided? 3. Who should be covered? Retirees Dependents? 4. Should employees have benefit options? 5. How should the benefit plan be financed? 6. How should the benefit plan be administered?- employer, insurer, TPA? 7. How should the benefit plan be communicated?

Reasons a small company should require employee contributions for medical insurance (4)

1.EEs are accustomed to paying some level of contribution 2. Motivates employees who have other coverage options to use those 3. It is easier to require contributions beginning at the plan's inception rather than implementing after 4. Can help avoid legal problems since the contribution makes it clear who is covered by the plan versus opted out

Advantages and disadvantages of health spending accounts replacing health and dental plans

Advantages for Employer 1. Fixed contribution (control over cost increases) 2. Contributions to the account are tax deductible 3. Accounts are easy to administer Advantages for Employees 1. Accounts provide flexibility as to how the money is spent 2. Benefits are non-taxable to employee 3. Can be used to buy insurance 4. Employee can decide what expenses are covered Disadvantages 1. Benefits inadequate since there is no insurance 2. Inequities a) flat contribution rate means families receive relatively less protection than singles b) Percentage of pay contribution means lower-paid employees receive less protection

Cafeteria plan advantages (3) and disadvantages (3) to the employee

Advantages: 1. Employees can pay for benefit expenses on a tax-favored basis 2. Employees can have more control over their health spending 3. Not subject to federal income, FICA, or FUTA tax Disadvantages: 1. Benefit elections must be made prior to the beginning of the year 2. For FSAs, unused benefit dollars at the end of the year are forfeited 3. Since there is no FICA tax; may see slight reduction in social security benefits

Cafeteria plan advantages (3) and disadvantages (4) to the employer

Advantages: 1. Employer does not have to pay FICA or FUTA taxes on contributions 2. Creates increased awareness of the overall cost and value of employee benefits 3. Helps contain costs and prevent wasting benefit dollars on duplicate or unneeded benefits Disadvantages: 1. Large cost of administration of a cafeteria plan 2. If medical reimbursement account is included in the plan, total amount of the employee's account must be available at any time in the year 3. Adverse selection can result in increased costs 4. Plans are subject to complex coverage and nondiscrimination testing

Advantages (8) and disadvantages(4) of private exchanges

Advantages: 1. Increased employee choice 2. Cost-savings potential from increased competition across carriers 3. Increased consumerism from members buying-down benefits as a result of a transparent defined contribution approach 4. Robust online decision-support tools and customer service 5. Benefits administration 6. Shift of the financial and regulatory risks 7. Cost predictability (Fully-Insured) 8. Improved cost transparency Disadvantages: 1. Additional expenses for exchange operator financing 2. Less control over plan design, clinical management, and member outreach 3. Need for the employer to increase the defined-contribution amount over time 4. Other member concerns, such as loss of plan-sponsor support and less generous benefits

Definition of employee benefits

Broad definition - includes virtually any form of compensation other than direct wages, including: 1. The employer's share of legally-required payments (such as Social Security). 2. Payments for time not worked 3. The employer's share of medical and medically-related payments. 4. The employer's share of retirement and savings plan payments. 5. Miscellaneous benefits (such as employee discounts, severance pay, and educational expenditures). More limited definition - excludes legally-mandated benefits.

Advantages of voluntary benefits (4 Employer, 4 Employee)

Employer Advantages: 1. More benefits can be offered without significant added cost. 2. Can supplement or replace employer-sponsored benefits that have been reduced or eliminated. 3. Can act as an employee recruitment or retention tool. 4. Can offer to employees that meet performance targets. Employee Advantages: 1. Can get the employer's group discount. 2. In some cases, can purchase with pretax dollars. 3. Convenience of obtaining benefits through the workplace and during work time. 4. They are often portable

Plan design approaches for controlling adverse selection

PD CONTROLL 1. Parallel design control should be maintained - include vision & ortho at same coverage in all plans 2. Delay full payment - lower benefits during waiting period 3. Certain expenses can be group together - predictable expenses (dental) grouped with less predictable expenses (supplemental medical) 4. Offer a health spending account 5. Not allow a large spread between options 6. Test the program with employees - bring light to potential design weakness 7. Require proof of insurability for increases in coverage 8. Only allow mid-cycle changes if a life-changing event occurs 9. Limit the frequency of choice - allow benefit changes only every 2-3 years 10. Limit the degree of change - restrict changes to one level of coverage per year

Times when changes may be made through a special enrollment process

Participants Account: 1. Changes in marital status 2. Changes in # of dependents 3. Changes in employment status 4. Changes in dependent eligibility 5. Changes in residence Dependents Account: 1. Changes in marital status 2. Changes in # of dependents 3. Changes in work status 4. Changes in spouse's employment status

Benefits that can be offered in a cafeteria plan (7)

Qualified Benefits ( offered on pre-tax basis) 1. Employer-provided accident or health coverage - medical, dental, vision, disability, AD&D, business travel, hospital indemnity, cancer, Medicare supplements, reimbursements for FSAs 2. Individually-owned accident or health policies 3. Employer-provided group term life 4. Employer-provided dependent care assistance 5. Employer-provided adoption assistance 6. Contributions to 401k 7. Contributions to an HSA Permissible Benefits ( taxable) 1. Cash 2. Paid vacation days 3. Group term life insurance in excess of $50k

Employee Tax Savings With HSA

Tax Savings = (Employee Paid Premiums + HSA Contributions) * Tax Rate

Approaches for setting employee contribution levels for an employer health plan

Two Basic Approaches: 1. Defined Benefit - setting the employee's contribution equal to a specified percentage of premium - employer gives greater subsidy for richer plans 2. Defined contribution - employer provides a defined dollar subsidy regardless of plan choice Other strategies employer might use: 1. Income-based - higher contributions for higher-paid employees 2. Dependent subsidy or spousal surcharge - require a greater level of contribution to cover dependents 3. Health Incentives - implement wellness programs where employees receive premium reduction for healthy behaviors