Local Government Self-Insurance Program (LGSI)

Guidelines for Self-Insured Employee Health Benefit Program
Financial Soundness

Adopted May 1999 by the State of Washington Health and Welfare Advisory Board

PURPOSE:

Establish the financial safety and soundness guidelines for individual local government self-insured employee medical benefits programs subject to RCW 48.62 (programs) to:

  • Provide the criteria utilized by the State Risk Manager in evaluating programs;
  • Outline potential sequences of communication and actions by the State Risk Manager should a program fall below the minimum or secondary financial positions defined herein.

REVIEW CRITERIA:

The following criteria will be used in reviewing and evaluating a self-insured employee health benefit program’s financial position and degree of potential change:

  • Annual reports submitted to the State Risk Manager;
  • Size and type of program (medical, dental, vision, etc.);
  • How often costs/rates change;
  • Dedication and access to available reserves;
  • Extent to which available reserves are dedicated to program funding requirements;
  • Change in person performing funding projections;
  • Actuarial recommendations;
  • Change in the process or methodology used to develop funding projections;
    Expenses for paid claims, incurred but not reported claims, insurance cost exceeding annual program budget/revenue;
  • Type/amount/change or termination of stop loss coverage;
  • Significant increase/decrease in employees covered;
  • Changes in coverages offered;
  • Change in stop loss insurance carrier;
  • Change in budget, financial statements, and financial strategy plans;
  • Financial position as compared to actuarial recommended levels;
  • Changes in program administration;
  • Trends of above criteria.

MINIMUM AND SECONDARY FINANCIAL POSITIONS

Each self-insured employee health benefit program shall adopt a policy on how it will address both expected claims and expenses (IBNR) as well as expenses for circumstances unknown or unforeseen in its program budgeting and funding. The intent of this policy is to minimize budgeting volatility and funding spikes for operating departments while addressing employee concerns regarding the solvency of the benefits program. The IBNR funding is to be specifically dedicated to the employee health benefit program(s). The additional contingency reserves can be specifically dedicated to the employee health benefit program or included in a general reserve fund established by the entity to cover contingencies from multiple programs. Should the reserves created under the policy become insufficient to meet the obligations created by the self-insured program, the entity shall take appropriate steps to commit the additional funds required to meet those obligations.

Minimum Financial Position
The minimum financial position for a program is:

  • Fully funded incurred but not reported claims liability (IBNR). The IBNR is defined as the program liability for claims and related expenses outstanding at year-end as estimated by a qualified actuary, consulting broker and/or TPA. As provided in WAC 82-60-031 an actuarial recommendation is not required if the program purchases aggregate stop loss insurance and funds to the stop loss limit. The IBNR is to be fully funded throughout the fiscal year period and adjusted at the end of each subsequent fiscal year.

    A program at or trending below the minimum financial position may cause the State Risk Manager to initiate one or more of the following actions:

  • Initiate communications with program administrator. Verify financial position and other issues of concern. Request program’s plan of action, methods to be used, objectives to be achieved, time frames, and willingness of the members to pay additional assessments if required;
  • Establish milestones for reporting progress;
  • Monitor results of program’s financial performance for compliance with program’s plan of action;
  • If concerns continue, renew communication with program administrator;
  • As necessary, continue communications with program executive committee;
  • Institute formal corrective action plan.

Secondary Financial Position

The funding for local government self-insured employee medical benefit programs is set on a one or two year basis and the ability to seek authority for additional funds may not be practicable or even possible. A contingency reserve in addition to funding the IBNR is to be included in the program's reserve policy to ensure the program can weather emergency financial situations.

Such a reserve assures funding of the IBNR liability as required by the GASB. The contingency reserve also promotes the stability of self-insured programs, allowing them to address unforeseen circumstances in program budgeting and funding. Programs maintaining such reserves are able to address additional unexpected costs without significant premium increases unanticipated by operating departments. Without such a reserve, a program is in a more immediate position of insolvency in the event of unexpected costs.

Note: A program’s equity (surplus funds) will increase or decrease according to the experience of the program. The size and type (dental and/or vision, etc.) may warrant funding at a different equity position.

Potential actions the State Risk Manager may take for programs which are at or trending below the secondary financial position:

  • Increase frequency of reporting /monitoring;
  • Initiate communication with program administrator to verify financial position;
  • Review financial plans and data from program administrator;
  • Monitor future financial performance commensurate with degree of concern and responsiveness of program’s recovery plan.

NOTES:

  • Exceptions to requirements/guidelines must be approved by State Risk Manager based on WAC 82-60-070 .
  • Actuary means any person who is qualified under WAC 284-05-060 to provide actuarial services.