For larger groups, which have more predictable claims expenses, insurers generally "experience rate" on the basis of the group's past claims experience or anticipated future experience. In a few areas, such as Rochester, New York, large employers have forgone experience rating and have shared risk more broadly with other employers and individuals in the community as part of a broader strategy to keep health care widely affordable throughout the community and to discourage cost control based on risk segmentation rather than on the more effective and efficient production and use of health services (see Chapters 5 and 6 for further discussion).

To attract employer clients who might otherwise self-insure, insurers have devised variants of experience rating that minimize the payments that actually flow from employer to insurer (see HIAA, 1992, especially the table on p. 61, Part C). For example, under what is called a minimum premium arrangement, the employer deposits money to cover a defined portion of its expected claims expense into a bank account or trust fund from which the insurer, acting as an administrative agent, pays claims. These amounts may be exempt from state premium taxes and can earn investment income that accrues to the employer, not the insurer. The portion of the premium that is actually paid to the insurer essentially provides for insurance should claims expenses exceed the defined amount that the employer has paid into the trust fund.

An employer may establish another type of partial self-insurance arrangement wherein it covers claims expense up to a defined level and purchases stop-loss insurance for expenses above that level. Specific stop-loss coverage applies when claims for a individual health plan member exceed a defined level, whereas aggregate coverage applies when total claims exceed a designated amount (e.g., 125 percent of total expected claims expense). Employers may purchase both kinds of coverage with different maximums. A self-insured employer may purchase stop-loss coverage from an insurer but purchase administrative services from either the insurer or a separate administrative agent. Fully self-insured plans may also purchase administrative services only (ASO) from either kind of organization. Some employers, however, administer their own claims.

Both minimum premium plans and self-insurance with stop-loss coverage involve relatively little transfer of risk to the insurer. Both may involve the creation of a special trust into which the employer pays to cover its defined level of claims expense. The most common approach is to establish a "501(c)(9)" trust (also called a voluntary employee beneficiary association, or VEBA).

A final point on funding is that most employers fund health benefits for both active workers and retirees on a pay-as-you-go basis rather than setting aside funds to cover obligations for future retirees. As noted earlier, recent changes in financial accounting standards require employers to recognize



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