Health Care Trusts

1. Health Care Trusts What they are How they are organized How they are governed How they are funded How they work Their advantages

2. What they are Groups of school employers who pool funds to pay for health care (and other) benefits • Six large multi-employer trusts in PA cover over 30,000 employees • Established under IRS Code 501(c)(9); non-profit, tax exempt entities • Usually sponsored by an Intermediate Unit • All six self-insure their benefits and purchase reinsurance to cover catastrophic claims Health Care Trusts

3. Legal authority • IRS code section 501(c)(9) provides for multi-employer welfare associations • Majority of trustees must be covered by plan • Funds may be used only for employee benefits and administration of plan • IRS must approve trust agreement • Because all employers are public entities, PA insurance department approves self-insurance Health Care Trusts

4. How they are established • Sponsoring employer (usually an IU) drafts trust agreement; obtains IRS approval • Sponsor appoints trust administrator • Serves as chief executive • Oversees day-to-day operations • Employers all sign a trust agreement and appoint trustees to govern trust • Changes to agreement require approval of majority of members’ boards Health Care Trusts

5. Trust agreement • Describes board of trustees and powers and duties • Tells how to set funding rates and collect contributions • Defines accounting requirements • Sets requirements for membership, withdrawal • Provides organizational framework • Standing committees, responsibilities • Meeting requirements Health Care Trusts

6. Board of Trustees • Majority must be covered by the benefit plan and generally represent • Board of Education • Central Administration • Professional Staff • Education Support Staff • Typically all member employers appoint the same number of trustees • Term in office and replacement determined by Trust Agreement Health Care Trusts

7. Trustees’ powers and duties • Establish funding rates • Hire claim administrator, solicitor, consultants • Select insurer and purchase reinsurance • Approve all expenditures • Establish policies regarding reserve levels, reinsurance deductibles, etc. • Invest surplus funds; borrow money if necessary • Hear anonymous appeals from plan members on un-reconciled claims problems Health Care Trusts

8. Funding Sources • Employer contributions • Self-pay and other employee contributions • Earnings on invested surplus funds • Reinsurance • Claim Reimbusements • Refunds of unused reinsurance premium (more on this later) • Rebates on Rx drug formulary use • Recovery of funds from subrogation Health Care Trusts

9. Uses of funds • Pay claims for benefits • Pay cost of claim administration • Pay for solicitor and consultants • Pay for internal administration, accounting • Invest surplus funds • Generally limited to insured investments • Used to stabilize rate increases • Used to pay run-out claims upon withdrawal or dissolution Health Care Trusts

10. How funding rates are set • Rates are based on experience, trend factors and financial position • 3 years’ experience projected • Projections adjusted for member credibility • Administration, reinsurance costs added • Adjusted to reflect member’s reserve position • Developed rates reviewed by business managers, revised if needed • Final rates approved by trustees Health Care Trusts

11. How They Work • Members make monthly payments to trust • Rate times number of employees • Self-pays added • Trust pays claim invoices weekly; administration, reinsurance and others monthly • All member revenues and expenses booked against each member’s account • Monthly accounting statements provided to members • Books audited annually; auditor’s report provided to members Health Care Trusts

12. Why Self-Fund Benefits • There is no insurance in medical insurance • If premium exceeds costs, insurer pockets the profit • If cost exceed premium, insurer covers the costs, recoups loss next year • Self-funding lets members control the funds • Members determine contributions – not the insurer • Members retain and invest surplus funds • Surplus funds stabilize rates Health Care Trusts

13. How Reinsurance Works • Specific reinsurance covers any claim that exceeds deductible • Deductible level chosen by each member • New deductible starts each policy year • Aggregate reinsurance covers total claims that exceed attachment point • Attachment point is usually 150% of projected claims • Any specific claim reimbursements reduce claims that count against attachment point Health Care Trusts

14. A better way to reinsure • Trust members don’t need aggregate coverage – reserves cover aggregate losses • Trusts in PA formed the PA Trust consortium • Buying reinsurance together provides clout • No commission paid • Insurer retains 16% of premium (retention) • All other premium returned as claim reimbursement or premium refund • PA Trust self-funds first $ 1 million each year; reduces insurer’s premium and retention Health Care Trusts

15. No Change in Benefits • Trusts accept members’ benefits plans as negotiated between employer and employees • All PA trusts have contracts to access Blue Cross and/or Blue Shield networks • Enjoy full provider discounts • Wide national provider network • Trusts can provide consulting advice in benefit design and negotiations Health Care Trusts

16. Advantages Trusts help individual schools better manage benefit costs • Self-funding provides better fund management • Group purchasing provides market clout • Lower administration costs • Lowest possible reinsurance costs • Better all-around negotiations with providers • Reserves help stabilize rates for members with higher-than-expected claim costs • Employee participation sometimes facilitates negotiations Health Care Trusts

17. Performance • In the PASBO survey of medical and Rx drug program costs in 2002-03: • 360 schools with 114,000 employees averaged $6,778 per employee • 85 schools in self-funded trusts with 27,000 employees averaged $5,997 per employee • Trusts have eliminated commission payments for reinsurance • Trusts’ records have helped them recruit over 40 schools in the last 5 years Health Care Trusts

18. PA Self-funded Trusts • Central Susquehanna • Eastern Pennsylvania • Lincoln (south-central) • Northeast PA Schools • Northwestern Region • Schuylkill County • Single-employer schools with trusts • Conrad Weiser • Bellefonte Area • Ephrata Area • Midwestern Intermediate Unit Health Care Trusts