e e e 0 Stop Loss None e e i ni tia l ly , then e e e CFR No - PDF document

State of South Dakota Employees Benefit Program Ri sk Mi tigation Strategi es

Purpose of Study • During 2013 legislative sessi on, the Appropriations Committee and Sub Committee on Insurance requested BHR to review stop loss coverage for the State Employee Health Plan • During the summer of 2013, BHR enlisted the assistance of Silverstone Group to do a preliminary exploration into Stop Loss Coverage options for the State Employee Heal th Plan - In July 2013 Aon He witt was selected to serve as the States benefit and actuari al consultant • BHR and Aon Hewitt's actuarial consultants explored stop loss as well as other risk mitigation strategies • This reports serves to provide the results of our analysis and BHR's recommendations '\t ;ing I He.a ~ & Be ne f:: s Co n5 . P ro p ri ie:'.3r/ & Con iid enti :; I

Executive Summary of Results • BHR and Aon Hewitt explored three risk mitigation techniques: - Stop Loss (SL) - Catastroph ic (Cat.) or Claims Fl uctuation Reserve (CFR) - Guaranteed Cost Model (GCM) • The following res ul ts were found: Risk Mitigation e e e 0 Stop Loss None e e i ni tia l ly , then e e e CFR No ne e e 8 GCM Ma Jo r e e e No Change None • Re mainder of presentation describes results in deta il A()tl Con5 . : in g I H e: ~ & Benef.ls Hewitt 3 Prep · eia r/ & Confidenti al

Stop Loss Com: . •~ ing I Hea "th & Be ne E: s ~ Hewitt 4 Pro p ri e:'.3r/ & Con iid enti ::. I

Stop Loss - Defined • Aggregate Stop Loss covers claim amounts greater than a certain percentage of total expected plan costs Usually a 20% or 25% attachment point (i.e. amounts above these levels are protected with SL) Typically pu rchased by entities with less than 2,500 employees • Individual Stop Loss covers incurred expenses over a given threshold generated by a single member For large entities, such as 10,000 employees, rarely encountered • Although not completely actuarially credible at these high dollar claim levels (above $500K), the likelihood is low that the cost associated with purchasing this coverage would be less than the poor experience avoided A()tl i/.: in g I H e: ~ & Be ne f..1 s Con5 ! Hewitt 5 P rep ·e:ar/ & Confld en ti :I

Stop Loss Premium Quotes s unU/ e specific PCPMRo te HCC PEPMFlate IN G PEPMRate IN6 PCPMRa te Tentative Tentative F i rm F irm ___ E .d .. SS00 ,000 An nucl Prem i'l!' m ~22. s _ s1 7_:n.2 _ so Agg regatini Specific Add 'I la :: er Li abi li t'( $2 ,0 00, 000 Sl ,. 300 , 000 t- T ot _ _ a_ l P _ o _ te _ n _ ti _ al _ L _ ia _ bi _li~ ty ---,t---- $6 , 0~225 ___ _ S /50,000 A o1 mu cl Prem i 'l! m :$ 1 =..3, 5 667 S8.3S t- "'=" '"" =• ._ a -"t i~ n, "s ,. ;o -" e -" cif .. ic c.----, , ---·- SO "-·---·- Ad d'l t.a.:erli :s bi lirv Sl 1 ~000 $1, 0: 0, 000 Total Po t ential Liability $4 , 135 , 667 $5.8 ! _ ~?2'9 -- .$6.28 Sl ,000,0.."0 Annual Prem ium _ .,_ _ _ $935 ,1 41 _ $1, 104,.198 $6.93 -- $1, 975~ 766 $12 _ 40 _ :_~gr egci tini Specific · ------ so -------·- ·- -~1,000, 000 --------· ~ ssoo , ooo ------------------ · so ---------- _ ____ _ Add'l t ase r Lia Di l ii v s1 5 00 000 S500 ODD 50 SO SS:00 ODO S750 000 50 .SO S3 as Total Potential Lia bilitv 141 $3 250 329 Sl 604 198 $1975 766 s1,2so, o:o Annual Premium $973 , 543 5".11 5661 , 244 $4 . .15 S.1 , S18 ,47 2 S9.53 ,_ •~ gg ~• ~ =i: ~• _ti ·~ n;g~s ~p_ e_ c if_ic ___ _, , ____________ _ 1-yoo, 000 ------· __ ssoo,ooo ------------ so ---- - -- 1- S.25 0,00D _______ 1----- '"- -S O ---- .. ------------· A _d_ d _ ' l_ , _ ,_ ., _L _ i, _b_ i li ~ tt _, ___ ..._ ___________ i- SO ___ ,._.._ __ S5CO , S00 SO SO Total P ote ntial Lia bilitv $2 224,043 Sl 161 244 $1 518..472 S1, SOO ,O:O Annu2I Pr em itr m S9 07 170 $6 .07 Aelc'reeatin" s io ec ific S.25 0000 Add'I u ser Lia bil iw S25 0000 so Total P ote ntial Lia bi li ty $1,467, 170 s2,aoo ,o:o A , nu ;;I Prem iti m I- ~.5 , !4 5 .__ _ $4. ID _ Ag~ re t::a tin~ Specific S.2 00000 so Add'I Laser Lia bi li tv so Total P ote ntial Liabi li tv S8:.SS 1 4i Con5- ' ing I H ea )h & Be ne E: s Proprie:::ir/ & Con iid enti: I

~ ~ ~ How many large claims should we expect? • Expect that there will be at least 1 claim Probability of Claims over ISL Deductible - 88 % likelihood 1 claims is over $1 M 45 % ----------------- - 72 % likelihood 1 claim is over $1.25M - 58 % likelihood 1 claims is over $1. 5M 35 % • No more than 7 claims are expect ed 30 % above $1 M deductible > E 2s% • No More than 6 claims are expected Ill above $ 1. 25M deductible 20 % a. • No more th an above 5 claims are 15 % expected above the $1 . 5M deductib le 10 % 5% 0% s 0 4 7 1 2 3 6 Number of Clai m ants over Deductible - $1M - $1.25M - $1.SM Con s ., ing I H ia:::. ':th & Be ne[1 s AOfl H ewi lt Pro p ·- ; 3ry & Con fl denti ::. I

Stop Loss Example Summary State of South Dakota Illustrative Stop L oss Example Summary FY 2012 FY2013 No Stop Loss- Current Plan Claim Costs \Nithout Stop Loss $103.8 $111.6 Administrat i ve Costs $8.0 $10.0 Total Expense $111.8 $121.6 Stop Loss- Current Plan Claim Costs \Nithout Stop Loss $103.7 $111.1 Administrat i ve Costs $8.9 $10.9 Total Expense $112.6 $122.0 ($0.8) ($0.4) Stop Loss Savings Co n!: '!L :ing I H ea :th & Bene f.-: s 8 P rcp ri e1 ary & Con id en ti :. I

Stop Loss Example - Details Based on Sun Life tentati ve $ "1 M specific deductible stop loss quote - $5.87 PEPM premium - Does not protect aga in st overall aggregate poor claims experience - Two lasered ind ivi duals with additional liabilities of $1 ,500,000 and $800,000 B Based on F Y1 2 Enrollment and H ig h Cost Claimants ased on FY13 Enrollment and High Cost Claimants Premium (PEPM) $5 87 Premium (PEPM) $58 7 Employees 13,057 Employees 13,297 Premium Paid by State $919,735 Premium Paid by State $936, 641 Lasered HG Claimant #! Claims Cost $2,407,068 Lasered HG Claim an t #1 Claims Cost $1 ,2 15,653 Total SL Threshold ($ 1 M + $1 .5M Laser Li ability) $2,500,000 Total SL Th reshold ($1M + $1 5M Laser Liabili ty) $2,500,000 Reimbursement Received $0 Re imbursement Received $0 La sered HG Claimant #2 Claims Cost $517,178 Lasered HG Claimant #2 Claims Cost $561,296 Total SL Threshold ($ 1 M + $800k Laser Li abili ty) Total SL Th reshold ($1 M + $800k Laser Lia bi li ty) $1 ,800,000 $1,800,000 $0 Reimbursement Received $0 Re imbursement Re cei ve d HG Cl ai mant #3 Clai ms Cost HG Claimant #3 Claims Cost $1,107,266 $1,489,812 SL Threshold ( $1 M) $1,000,000 SL Threshold ($ 1 M) $1 ,0 00,000 Reimb ur sement Received $107,266 Re imbursement Received $489,812 Total Cost to State (Premium - Reimbursements) $812,469 Total Cost to State (Premi um - Reimbursements) $446,829 Number of HC c la imants needed to exceed $1M in re im bursement (and ann ua l SL premium) to make stop loss fi na nc ially advantageous (excludes lasered individuals): 4 Individuals with at least $1.25M large cl aims • Aon Hewitt modeli ng estimates 4% probability of this scenario • 2 i nd iv idua ls with at least $1.5M large claims • Aon Hewitt modeli ng es ti mates 22% probability of this scenario At:JII Cons -~ ing I He:. ':th & Be ne f.1 s Hewi tt 9 P rop ·-:3ry & Con identi ::. I

Guaranteed Health Cost Strategy Co n!: .'!L: ing I Hea~ & Be ne f.-: s ~ Hewitt 10 P rop ·s: ary & Con i d en tial

Guaranteed Health Cost (GHC) Overview • Aggressive Cost Control Efficient network/provider purchasi ng Increase accountability of individual population health Plan design driving desired consumer be havior Manage highest cost, most complex diseases more efficiently • Cappi ng Trend at x% over 3 years "x" determined by employer, balance cost reducti on with ability to drive and effect change in covered population Dol la r for do ll ar liabi li ty guarantee for spending in excess of PEPM guarantee - Annual budget capped, even with 3 year program wi ll be intermittent payments to meet a nn ual budget if exceeded in year 1 or 2 • Previously not an available soluti on for a claim based liab il ity financial guarantee New innovati on within employer healthcare cost management Implementati on timeline more expansive than traditional stop loss To be a viable sol ut ion, expect premiums - 1.0 - 1.5% of overall cl ai m spend A()tl &onsllei,,g1 Holl!lllt81lohB!i,i os 11 Hewitt 11 Propretary & Confidential I 2013

Guaranteed Health Cost (GHC) Overview • Self funded , claims capped at ceiling • Cap trend based on employer choice • Manages/focuses consumer driven pu rchasing, efficient network/provider contracting, and behavioral improvements Reinsurance carriers wi ll base their premium quotes on the perceived effectiveness of the programs in place • Employer st il l has control, drives Guaranteed Health Cost program structure for 3 year duration 12 Gon~ 1-!~ t fl,i.~ 5 12 Propriel;ary & Confidential I 2 01 3