Page 284 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

270 The Complete Guide to Executive Compensation

Under a scheduled plan, each covered expense is identified and a maximum dollar reim-
bursement assigned. Typically, such plans also have an extended medical reimbursement
feature that will pay a specified percentage (e.g., 80 percent) of all covered expenses beyond
the schedule after an annual deductible (e.g., $500) is fully paid by the employee.
Additionally, a stop-loss feature similar to a comprehensive plan is usually included. As can
be seen, the two plans are highly similar. The scheduled plan will reimburse a higher percent-
age of medical costs in communities with lower-cost health services. Such a plan requires
periodic updates to increase schedules to appropriate levels of reimbursement.
Where the company has enough employees, these plans are experience related, which
means that the premium charged by the insurance company is determined by the claims
experience only of this unit. Conversely, HMOs are community rated—meaning that premi-
ums will be determined by the experience of the full community of users, not simply the users
from a particular company. The third approach is to pool experience, or place a group of
employees in a unit consisting of other groups; the premium is based on the experience of the
entire pool.
Factors affecting the premium charged include (1) plan changes, (2) prices of services,
(3) size of unit covered, and (4) utilization of the plan. As these increase, one can expect the
premium to increase, and conversely, as these decrease, one should expect a reduction in
premium. Usually a combination of different rates of increase occurs among the four items.
When the insurance carrier and the employer differ significantly on the premium level
for the following year, quite often they agree to write a retrospective premium adjustment, or
“retro,” into the contract. The carrier agrees to accept a lower premium; in exchange, the
employer agrees to reimburse expenses at the end of the year up to a predetermined limit.
Thus, the employer improves cash flow during the year in exchange for an increased level of
financial risk at year-end.
Another way companies control health-care expenses is by entering into a minimum pre-
mium arrangement with the insurance company. As the term implies, this reduces premiums to
a minimum, maybe 10 percent of their former size. But, the company agrees to deposit into a
bank account an amount believed sufficient in size to cover normal claim experience. The
carrier agrees to pay any and all claims beyond the amount deposited by the company. The
premium paid by the company is to ensure this excess protection. This approach results in
savings to the company in two ways: (1) a reduction of proportionate amount (e.g., 90 percent)
in premium taxes due the state and (2) significant reduction in reserves (i.e., company money
held by the carrier) to cover open and unreported claims (commonly called “O and U”). These
are claims that are incurred during the year the contract is in force but not paid until the
following year (when the contract may no longer be in force) because they were either not
reported or were reported but not paid as of the end of the contract year.
The final step is when the company takes all financial risk for claims; in other words, it
becomes self-insured. This may be either on a “pay as you go” basis or by establishing reserves
to level out payments. If the company establishes a trust in conformance with Section
501(c)(9) of the IRC, it can take a deduction for the amount contributed to the trust, or
Voluntary Employees Beneficiary Associations (VEBAs). Additionally, earnings of the trust are tax
deferred, thus making contributions very cost effective. While the trust is constructed to
hypothetically meet all claim expenses, unusual circumstances could completely exhaust the
funds before paying all claims. Rather than face this possibility, some companies purchase
stop-loss protection that stipulates at what point the insurer will assume responsibility for
losses.