Author: Eric Swartley, LD&B Employee Benefits Consultant

Contract Terms and Strategic Change

When considering a benefits strategy for your company, it is important to have a clear vision of your objectives. Do you need a short-term win, or are you in it for the long haul? Or, will you take the off-ramp from the long play to take advantage of savings when the “too good to ignore” offer comes along, as it sometimes does?

Depending on your answer above, there are some structural provisions to consider.

What are your contract terms?

Self-funded long-term strategies often start on a 12/12 contract (claims incurred and paid within the same year). The next year will have a 24/12 contract, which is built to pick up any lingering incurred claims from the first year. Each subsequent year may extend further (36/12, 48/12, etc.).

In these examples, the second number of “12” indicates that only claims PAID within the 12 months of the plan year are considered under the contract. What about claims incurred in the last month or two of the plan year, or lingering claims that have been challenged by the claims administrator? If you are rolling into an extended contract term like a 24/12, those claims just carry into the new year. However, if you are changing strategy, you must factor in the “run-out”—claims incurred but not yet paid.

If you anticipate that an upcoming plan year will be the last year of a longer-term strategy, you can ask to build in the run-out in the form of a 24/15 or 24/18 contract, but of course that will increase the plan cost for that year.

What is Run-Out?

Run-out is a plan sponsor’s financial obligation to wind down a self-funded plan. Common components of run-out include:

• Claims administration: TPA will bill fees for a set number of months (usually 3 or 4) and offer a year’s worth of claims administration. Most lingering claims will have rolled in the first few months, thus the shortened fee period.
• Network Access/Continuation: Continued access to provider discounts for pending claims. Again, a shortened period (3 to 4 months) will be billed to cover a full 12 month period.
• Stop-Loss Premium: If your company is moving to a fully-insured plan, you will probably want to continue paying for stop-loss protection as your plan winds down. This can continue the protection provided for individual claimants (Specific Deductible) and for the group as a whole (Aggregate Attachment Point).
• Broker Fee: If you are leaving your current broker, they are likely to charge a few months’ worth of fees as they assist in closing out the self-funded plan. Most will waive fees if they remain the broker on the new platform.
• CLAIMS!: Claims incurred but not yet paid need to be funded, otherwise they will land on the members…which would be very unpopular to say the least.

Why are Contract Terms Important?

If you find yourself in a long-term, self-funded strategy and you hear the siren song of lower rates in a fully-insured or level-funded arrangement, always keep in mind that you may have a “tail” (run-out) to pay. These costs must be considered against any savings being offered by a competing plan. That’s not to say that savings are not real…sometimes the net savings after considering the costs are still too great to ignore! However, you will want to make sure to weigh these run-out expenses against any projected savings to get the full picture.

Other Considerations

Good long-term strategies will come with some protection in the form of rate caps or other underwriting concessions. Short-term strategies for small to mid-sized businesses will generally work great until claims costs rise, and then a group will find itself at the mercy of the “market”. If an expensive, chronic ailment pops up during a “savings” year, expect substantial increases in premium the following year.

Lastly, if strategy dictates a quick and painless exit (closing or selling a business), the easiest way to do that is to enter into a fully-insured plan. Winding down a fully-insured plan is much simpler, as it typically just requires notice to employees (60 day notice of Material Modification) and to the carrier (30 days). All claims will be handled by the carrier that was in force at the time the claims were incurred.

Summary

Companies go through different phases, and benefit plan structures must match the strategic needs of a company at any point in time. At LD&B, we have access to all varieties of benefit plans, and we will work with you to find the right fit!