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Pooling design aims to cut stop-loss costs

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TUCSON, Ariz.—Health plan sponsors that are having problems finding affordable medical stop-loss insurance should pool their plan funding and reinsurance risks through a newly designed arrangement that promises a plethora of cost-saving and plan flexibility advantages, a consultant says.

The arrangement would allow groups of plan sponsors or an association--on behalf of its members--to set up a risk retention group that would cover a portion of the sponsors' assets that are dedicated to paying health claims and then purchase commercial excess-of-loss reinsurance for the remainder, said Stace C. Bondar, managing member of Exlman Re L.L.C. of Baltimore.

Among other things, the pooling design would allow plan sponsors to leverage their large group buying power, eliminate fronting insurers, legally avoid state-mandated benefits and avoid having to obtain U.S. Department of Labor approval, Mr. Bondar said during a session at the Captive Insurance Cos. Assn.'s International Conference in Tucson, Ariz.

Mr. Bondar is seeking approval for the first two arrangements of this kind in Montana and the District of Columbia and is in the process of developing it for nine others in six domiciles. Montana regulators said the facility has been tentatively approved. The facility, AD-COMP MED RRG Inc., is owned by 271 automobile dealership franchises in California, Mr. Bondar said. He declined to identify the District of Columbia facility's owners.

Need for the arrangement has intensified significantly in the past five years, he said, during which U.S.-based medical reinsurance sources have dwindled from about 300 to fewer than 50.

Among remaining reinsurance markets, many have long "ineligible industry" lists, and others charge certain industries "significantly higher rates" than they charge others, he said. Industries having the most trouble finding coverage are hospitals, law firms and trucking companies, he said.

Under the arrangement that Mr. Bondar is seeking approval for in the District of Columbia, a group of self-funded health plan sponsors with core businesses in the same industry banded together to form a risk retention group without any involvement from an association.

Each sponsor designed its own plan, including its own benefit design and its own deductible or retention level. Under the Employee Retirement Income Security Act, each self-funded plan is exempt from state laws relating to benefits, including mandated health benefits.

Still, in that kind of arrangement, each plan sponsor has a contractual obligation to participants to fund the plan with the sponsor's assets.

That is where the RRG comes in. The facility's members/owners determine how much of the aggregate retention the facility will accept.

The RRG then quotes, underwrites and issues to each of its members/owners a contractual liability policy that promises to cover or reinsure their contractual obligation to their health plan participants to fund the plan with their own assets.

The RRG then goes to the commercial market to buy reinsurance for the portion of the risk its members/owners decide to cede. The commercial policy responds when losses exceed a plan sponsor's per claim and aggregate retention levels.

So, for example, a group of plan sponsors with $1 million of total health plan risks decides to retain $250,000 of that risk in the aggregate, with each plan sponsor selecting a different retention level. The total risk is ceded to the plan sponsors' RRG, which retains $250,000 and cedes the remaining $750,000.

The key to this arrangement is that the policy does not cover a medical claim but instead covers a plan sponsor's assets against losses resulting from a large medical claim, Mr. Bondar said. "The key to success here is to pool at the reinsurance level, not the health plan level."

In Montana, the process for establishing a reinsurance mechanism for a group of health plan sponsors was more complex but demonstrates how an association can become the driving force behind one, Mr. Bondar said.

In that case, service vendors for a self-insured workers comp pool wanted to help pool members with their self-funded health plans.

The group of accountants, lawyers, bankers and other service providers formed an association and then sold shares in it. With that capital, the association formed a captive that issued a surplus note to the RRG that the workers comp pool members formed for their health plans. Since the RRG was not designed to insure the association and its members are not in the same industry as the plan sponsors, federal law precluded the association itself from forming the RRG.

The RRG also could cede part of its members/owners' retained risk to the association captive. Like the District of Columbia-domiciled RRG, the Montana facility would purchase excess-of-loss reinsurance for the part of the risk it and the association captive does not retain.

The surplus note, which the RRG has to pay back over time, was accepted by Montana regulators as appropriate capitalization as long as each RRG member/owner demonstrates it made a capital contribution to the facility, Mr. Bondar said.

To that end, Mr. Bondar negotiated an agreement under which each member/owner would have to make only a small capital contribution up front but would have to surrender all of its equity in the facility if the member/owner pulled out of RRG in less than three years.

After three years, the portion of the surplus note that would be repaid out of the facility's surplus would be considered an adequate capital contribution, he said.

A major advantage of either the District of Columbia- or Montana-domiciled RRG is that a fronting insurer is not necessary, since an RRG can issue its own policy, Mr. Bondar said. "Fronting carriers can charge as much as 10% of premiums paid in order for a program to use their paper," he said.

In addition, because a plan sponsor would not be in a single-parent captive, the sponsor would not have to obtain a prohibited transaction exemption from the Department of Labor.

The exemption would be necessary if a pure captive were used, because the DOL wants to ensure that the captive owner has not devised a system that provides it advantages to the detriment of plan participants, Mr. Bondar said. The exemption is not required when a plan sponsor participates in an RRG because the odds of pulling many plan sponsors into a scheme that could hurt their plan participants are considered very low, he said.

By pooling risks in an RRG, reinsurance availability increases and costs decrease because reinsurers see little risk of having to pay a claim above a retention that far exceeds those that an individual cedent would maintain, Mr. Bondar said.

Over time, RRG members/owners should be able to build surplus to gradually raise the retention level so the facility can reduce or even eliminate its reinsurance needs, he said.

He said the only similar arrangement in use today involves the interplay of voluntary employee beneficiary associations set up by seven highway contractors and the RRG the contractors have set up (BI, Sept. 11, 2006).

But Mr. Bondar said plan sponsors cannot pull their capital out of VEBAs unless they convert to a fully insured plan and that VEBA recertification costs are expensive. He asserted that his mechanism would be 25% to 30% less expensive.