Case study: Plan testing during a mid-year amendment
How does a complex pension plan not only pass nondiscrimination testing but also pass this testing in the future?
Self-insured employers have long evaluated provider discounts offered by medical third-party administrators (TPAs) to assess the opportunity to reduce the cost of providing health insurance benefits to their employees.
A provider discount analysis estimates the difference in expected allowed claims costs by applying provider discounts from competing TPAs to an employer’s historical billed charges. Provider discount analyses are generally thought to do a reasonable job of estimating the expected change in discount upon switching TPAs, but there are several caveats to consider when interpreting the results:
As a result of these concerns, there is increased interest from both employers and TPAs in incorporating medical trend guarantees into TPA selection analyses. A trend guarantee may be broadly defined as an agreement between a TPA and an employer that compensates the employer in the event that the year-over-year trend in medical claims costs exceeds the negotiated amount. Though employers may intuitively expect that the use of trend guarantees will make the analysis simpler (i.e., take the bidding TPA that guarantees the lowest trend), there are many issues to consider for the self-funded employer:
We expect that TPAs offering trend guarantees will also attempt to control their exposure via reference to the following types of issues:
We expect employers to see an increase in the availability of trend guarantees. While trend guarantees may offer a useful hedge against unexpected increases in costs, employers should be diligent in understanding the fine print. A trend guarantee with a lot of caveats and a tiered payout schedule may not have a material impact on the value proposition offered by the TPA submitting guarantees.