COOPERATIVES AN INNOVATIVE APPROACH TO SELF-FUNDING

A cooperative is an attractive option for groups that want to practice mutual aid and share risk, with- out costly upfront capital requirements, and with benefits of using health management programs, such as wellness. A cooperative offers: • Stop-loss protection for expensive individual claims • Stop-loss protection for total annual claims • Low capital required • Limited financial support between employers – groups with better-than-expected results help those experiencing a difficult year • Immediate savings through risk management

Characteristics Employer self-funded Self-funded cooperative Self-funded pooled Claims cost Claims are deeply discounted as incurred without insurance administration costs. Administrative costs Lower overhead. Additional costs to administer Additional costs to administer (all lower than fully insured) group, assess premium, group, assess premium and calculate distribution and manage larger reserves. manage reserves. Capital investment Near zero. Relies heavily 2 to 5 percent of expected 50 percent of expected on weekly cash flow medical claims. medical claims. requirements.

Mutual aid Minimal – occurs through Moderate – occurs through Maximum – occurs through all stop-loss reinsurance. cooperative risk layer (see risk levels. example on side 2). Managing risk PPO discounts, pharmacy discounts, drug rebates, plan design flexibility, medical management, trans- plant networks, wellness program, adherence to therapy support. Surplus distribution Not available. Annual distribution; paid out Distributions available if over three years if favorable reserves beyond set level; claims experience. annual assessments to determine level. Investment income Not available. Less reserve available for More reserve available for investment. investment.

supported by:

2120619 WHY JOIN A COOPERATIVE? Large swings in health care costs are driven by factors such as higher-than-expected employee medical needs or a catastrophic medical event. Stop-loss reinsurance offers protection from Reinsurance “shock” losses at high levels, but costs under the reinsurance threshold will vary.

Cooperative A cooperative – a group of employers contributing to funds that help pay for higher levels of costs – results in more manageable cost swings. Partnering with like-minded organizations through the MHS Alliance Medical Expense Plan, in this cooperative arrangement, is one way of practicing mutual aid while managing medical expense risk. Putting Employer 1 Employer 2 Employer 3 this type of risk management model in place frees employers to focus on their mission.

A COOPERATIVE AT WORK The examples below show how an employer handles the lower medical expenses, and invests a small amount of capital into the cooperative to support the payment of the larger medical expenses. At the end of each year, if the expenses are less than expected, the unused funds can be returned to employers as a distribution. Example 1 illustrates the importance of the capital investment in the cooperative. Example 2 shows how mutual aid may occur among participating employers through the cooperative.

Employer Employer Expected Capital Actual Employer Coopera- Investment deductible claims cooperative investment in cooperative remaining tive to be below claims1 cooperative2 claims investment gain (loss) replaced for deductible the next year3

Example 1 Employer 1 $50,000 $800,000 $200,000 $50,000 $225,000 $25,000 0 $25,000 Employer 2 $100,000 $1,600,000 $400,000 $100,000 $375,000 $100,000 $25,000 0 Potential distribution4: $25,000

Example 2 Employer 1 $50,000 $800,000 $200,000 $50,000 $50,000 $50,000 $150,000 0 Employer 2 $100,000 $1,600,000 $400,000 $100,000 $550,000 0 ($50,000) $100,000 Potential distribution4: $100,000

To simplify the above illustrations, the medical claims in both of the above examples did not exceed the reinsurance threshold, even though stop-loss reinsurance plays a very important role in managing the total medical expense risk.

1 These amounts are paid just like monthly premiums to the cooperative. 2 This investment is determined as 25 percent of expected cooperative claims. It is paid in a lump sum at the beginning of the first year. This helps with the cooperative’s cash flow. 3 These numbers assume that the expected cooperative claims for the next year are the same as for the current year. 4 Actual distribution will depend on the cooperative’s current surplus level and investment earnings, and be split to all employers with a cumulative gain since the last distribution.

2120619