Challenges with measuring savings in shared savings arrangements

March 20th, 2015

By Javier Sanabria

Shared savings arrangements attempt to tie provider reimbursement to performance or quality measures and reductions in the healthcare expenditures for an assigned population of patients. The most common form of these arrangements involves networks of providers that form accountable care organizations (ACOs). The practical task of measuring improvements by providers isn’t easy, especially measuring reductions in expenditure levels that are due to actions by providers. Milliman consultants Anders Larson and Jill Herbold provide more perspective in this healthcare reform paper.

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Possible changes to Medicare Part D reinsurance programs

March 17th, 2015

By Javier Sanabria

The Medicare Payment Advisory Committee (MedPAC) has previously suggested changes to the Medicare Part D reinsurance and risk corridor program. But several factors—the current state of the Part D market, recent attempts to curtail Medicare spending, and large increases in reinsurance payments—may increase the likelihood that MedPAC and the Centers for Medicare and Medicaid Services (CMS) will implement changes to Part D. Putting these changes in place will not necessarily result in decreased program spending and could cause an increase in the prevalence of private-sector reinsurance in the Part D market. Milliman’s Nicholas Johnson provides perspective in this paper.

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Regulatory roundup

March 16th, 2015

By Employee Benefit Research Group

More healthcare-related regulatory news for plan sponsors, including links to detailed information.

IRS issues publication for ACA-applicable large employers
Applicable large employers are subject to the employer shared responsibility provisions of the Patient Protection and Affordable Care Act (ACA) and related information reporting requirements. Under the ACA, an organization is an applicable large employer for a year if it had an average of at least 50 full-time employees (including full-time equivalent employees) during the prior year.

For this purpose, a full-time employee for any calendar month is an employee who has on average at least 30 hours of service per week during that month. An employer determines its number of full-time-equivalent employees by combining the number of hours of service of all non-full-time employees for the month (but no more than 120 hours per employee) and dividing that total number of hours of service by 120.

In addition, under a longstanding provision that also applies for other tax and employee benefit purposes, all employers with a common owner or otherwise related generally are combined and treated as a single employer for determining applicable large employer status.

For more information, read this IRS publication.

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IRS notice seeks comments on ACA “Cadillac tax” issues

March 12th, 2015

By Employee Benefit Research Group

In its first step to develop guidance on the excise tax that in 2018 will apply to high-cost employer-sponsored healthcare coverage under the Patient Protection and Affordable Care Act (ACA), the Internal Revenue Service (IRS) issued Notice 2015-16, which provides background information, definitions, and potential approaches the agency may incorporate into future rule making. The IRS notice invites comments by May 15, 2015, on three key areas relating to “applicable coverage”: the definition, cost determination, and the application of the annual dollar limit to the cost. A future separate IRS notice will discuss and seek comments on the procedures for calculating and assessing the excise tax (under tax code section 4980I and which commonly is referred to as the “Cadillac tax”). This Client Action Bulletin provides more perspective.

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Captive insurance considerations for group life and long-term disability sponsors

March 12th, 2015

By Javier Sanabria

Captive insurance can help employers reduce the costs of group term life or long-term disability (LTD) benefits. This arrangement provides employers with greater control over invested assets and possible tax savings. However, sponsors need to assess the underlying risks associated with these types of captives because they are different from the risks related to traditional captives in the property and casualty (P&C) sector.

In this issue of Benefits Perspectives, Milliman’s Paul Correia presents an overview of the evolving captive insurance market for large benefit plan sponsors. He also discusses significant risks that employers should think about regarding these funding arrangements. The following excerpt highlights some key risk considerations:

• Risk diversification—Employers with existing captive arrangements for P&C coverages may see opportunities for improving their enterprise risk management practices by adding group life and disability programs to the mix. Because P&C risks are often uncorrelated with group life and LTD risks, combining the different coverages under one roof may provide a better spread of risk. The resulting diversification may help mitigate risk by reducing volatility of claims experience. Similarly, an employer that does not have an existing captive and wants to establish one for employee benefits programs may also consider funding its P&C insurance through the captive, in order to diversify the captive’s risk attributes.

• Counterparty risk—Due to the nature of captive transactions that involve U.S. employee benefits, captives depend on the fronting companies to underwrite the risks and adjudicate the claims. The underwriting for group life and LTD insurance depends in large part on very company-specific perceptions of the underlying risks, such as LTD claim termination run-out patterns (i.e., whether benefits are paid for months or decades, depending on the cause of the disability) and group life mortality improvement. The adjudication of group life and LTD claims also tends to vary substantively from one company to another. The fronting company’s ability to effectively underwrite the risks and administer claims is an important risk consideration for employers that use captives to reinsure group life and LTD programs.

• Catastrophic risk—All insurance companies that provide group life and disability coverages are exposed to catastrophic risk. One random event, such as a plane crash, can cause extraordinary losses. This is a particularly important issue for group insurance writers due to the concentrations of risk by employer group and location. Catastrophic risk is a big concern, even for group insurers that have many group customers. It is an even greater concern to captive insurers that insure only one group. The impact of a catastrophic event can be reduced by entering into reinsurance and stop-loss agreements.

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2016 HHS risk adjuster coefficient updates

March 10th, 2015

By Javier Sanabria

The U.S. Department of Health and Human Services (HHS) finalized an update to the risk adjustment model coefficients used to determine the payment transfer amounts for the 2016 Patient Protection and Affordable Care Act (ACA) market. The impact of these changes depends on each carrier’s mix of enrollees. But there are several consistent themes when comparing the updated coefficients with the current ones. For example, carriers that enroll a disproportionate share relative to the market of sicker or higher-risk individuals are likely to receive higher-risk transfer payments. And carriers that enroll a disproportionate share of healthier individuals are likely to receive lower transfer payments or will have to pay higher amounts to other carriers. Milliman consultants Hans Leida and Scott Katterman provide some perspective in this healthcare reform paper.

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Insurers may leave federal exchange market if SCOTUS repeals subsidies

March 9th, 2015

By Javier Sanabria

Many insurers are contemplating the financial implications that a U.S. Supreme Court ruling against federal healthcare subsidies would have on their business. This Wall Street Journal article (subscription required) quotes Milliman’s Tom Snook discussing a potential exodus from the federal exchange if tax credits are rescinded.

Here is an excerpt from the article:

Insurers offering products in the federal-exchange states are worried that they could be caught short this year. An antisubsidy ruling could potentially take effect—and prompt consumers to drop coverage—as soon as this summer. Insurers are locked into rates for 2015 and typically wouldn’t be able to raise prices midyear. And partly because of state regulations, it isn’t clear if or when insurers would be able to withdraw from the federal marketplace before January.

But for 2016, if the federal insurance tax credits are unavailable in a state, “the impact would be substantial enough that I would expect many carriers to consider pulling from the market,” says Tom Snook, an actuary with consultants Milliman Inc. who is working with a number of insurers offering exchange plans. “There’s a question, if the subsidies are struck down, if it’s an insurable market.” That could leave consumers with fewer, and far pricier, choices.

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What we learned from the 2015 exchange open enrollment period: Three observations

March 6th, 2015

By Paul Houchens

Houchens-PaulWith the insurance marketplace open enrollment period coming to an end in February, the U.S. Department of Health and Human Services (HHS) has released new data on the total number of plan selections in the federal health insurance exchange. This information provides high-level information on the distribution of plan selections, split between new and existing exchange consumers, with further insight into the auto-enrollment process and consumer migration between plans. Three observations from this data:

1. Nearly 4.7 million new consumers selected a plan on the federal exchange, representing 53% of total plan selections. For insurers new to exchange markets in 2015, or priced more competitively relative to 2014, the high proportion of new consumers provides the opportunity for significant market share gains. If 2014 experience is an indication, consumers entering the exchange market will gravitate toward the lowest-cost plans. This is supported by emerging evidence of new market entrants and existing insurers (pricing more competitively in 2015) gaining market share. On a long-term basis, the individual market may experience a high degree of churn in its consumer base, which is due to changes in a consumer’s eligibility for Medicaid or affordable employer-sponsored health insurance that impact eligibility for exchange premium assistance.


2. The majority of existing exchange consumers elected to renew 2014 coverage. A major question going into the 2015 open enrollment period was the degree to which exchange consumers would shop for new coverage in 2015. More than 70% of existing 2014 exchange consumers, approximately 3 million individuals, elected to remain in the same plan for 2015. Although we do not have state- or insurer-level data, this likely has resulted in 2014 market leaders maintaining a large portion of their membership bases. Analysis of enrollment data from first quarter 2015 financial statements and changes in the insurer’s relative price position (RPP) in the exchange from 2014 to 2015 will provide better indication of the price elasticity of exchange consumers at the state level.

3. A large majority of consumers renewing their 2014 plans relied on the auto-enrollment process, increasing the likelihood of net premium increases in 2015. Despite strong encouragement by several journalists and HHS, only 34% of consumers renewing coverage for their 2014 plans elected to go through the active enrollment process. For these consumers, monthly premium assistance amounts for 2015 were recalculated based on their household incomes, ages, and their plans’ 2015 RPPs to the 2015 subsidy benchmark plan. For the remaining 66% of consumers who renewed coverage, monthly advanced premium assistance amounts in 2015 will be equal to 2014 amounts. To quantify the impact to consumers of auto-enrolling versus actively renewing their 2014 coverage, we examined cost differences for consumers who purchased the subsidy-benchmark plan in 2014. As illustrated in the figure below, consumers who purchased the 2014 subsidy benchmark plan and elected to forgo the active enrollment process increase their likelihood of monthly cost increases. For example, based on the distribution of county-level 2014 plan selections in the federal exchange, 79% of 60-year-olds would experience net cost increases of greater than $50 if auto-enrolled, while only 35% who elected to actively renew their 2014 plans would experience such increases.


While 2014 market leaders may have had a large portion of their membership bases renew coverage, a material portion of the membership base may have higher monthly costs in 2015 relative to 2014. This may result in 2015 persistency rates being much different than experienced in 2014.

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Employee benefits on the U.S. Supreme Court’s docket

March 3rd, 2015

By Employee Benefit Research Group

The U.S. Supreme Court has heard—and will hear—several cases that may be of interest for plan sponsors. On March 4, the Court will hear arguments on whether the federal premium tax credit subsidies available under the ACA are available to people in all states or only to those buying coverage in states with a state-run exchange. On February 24, the Court heard arguments on whether 401(k) plan participants may file a suit challenging the retirement plan’s fiduciaries’ actions that took place before the six-year statute of limitations period allowed under ERISA for filing a claim. The Court will also consider the constitutionality of state laws barring same-sex marriages and the recognition of same-sex marriages lawfully performed out of state, though oral arguments have not yet been scheduled.

This Client Action Bulletin summarizes these cases of interest for plan sponsors.

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Regulatory roundup

March 2nd, 2015

By Employee Benefit Research Group

More healthcare-related regulatory news for plan sponsors, including links to detailed information.

IRS issues first guidance on “Cadillac tax”
The Internal Revenue Service (IRS) has released the first piece of guidance on the excise tax on high-cost health plans in the Patient Protection and Affordable Care Act (ACA). The so-called “Cadillac tax” is set to take effect in 2018.

Notice 2015-16 is intended to initiate and inform the process of developing regulatory guidance regarding the excise tax on high-cost employer-sponsored health coverage under § 4980I of the Internal Revenue Code (Code). Section 4980I, which was added to the Code by the ACA, applies to taxable years beginning after December 31, 2017. Under this provision, if the aggregate cost of “applicable employer-sponsored coverage” provided to an employee (referred to in this notice as applicable coverage) exceeds a statutory dollar limit, revised annually, then the excess is subject to a 40% excise tax.

The notice describes potential approaches with regard to a number of issues under § 4980I, which could be incorporated in future proposed regulations, and invites comments on these potential approaches. The issues addressed in this notice primarily relate to (1) the definition of applicable coverage, (2) the determination of the cost of applicable coverage, and (3) the application of the annual statutory dollar limit to the cost of applicable coverage. The U.S. Department of the Treasury (Treasury) and the IRS invite comments on the issues addressed in this notice and on any other issues under § 4980I.

To read the entire notice, click here.

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