Among the most challenging problems in any

organization today—whether public or private—is

properly managing health and medical care costs. These

costs are spiraling uncontrollably, constituting a large

and volatile cash outflow. For example, medical costs

have increased at an annual rate of 12% over the past

two years and comprise about 17% of our country’s

GDP, equating to the following statistic: roughly, one

out of every eight total dollars spent in our economy

goes toward healthcare. Another way to describe it:

We’re spending about $9,542 per person, per annum,

on healthcare.

Unfortunately, the bad news is that such costs are

expected to rise even higher. Here are several factors

that are driving up healthcare costs:

turn 50 over the next 10 years. The financial impact of

this older population will be enormous, since roughly

75% of the dollars that an individual spends on

healthcare in his or her lifetime is spent after the

age of 50.

increasing faster than any other healthcare cost: e.g.,

20% to 25% increases are estimated for 2010.

Advertising campaigns encourage patients and

physicians to request and prescribe expensive, brand

name medications. New expensive drugs have entered

the market to treat chronic conditions like asthma.

Finally, an aging population often needs multiple

medications.

medical devices, and diagnostic techniques are raising

costs for hospitals and health plans.

consolidating the industry and eliminating competition,

putting the control of costs into the hands of a few

select groups. These hospital groups now have more

leverage when negotiating rates with health plans,

enabling them to gain significant increases in the

costs of their services.

overall risks for healthcare providers are greater than

ever. Consequently, this risk of litigation is spread to

all parties having healthcare insurance coverage

through higher premiums.

Healthcare costs are inherently unpredictable, whether

an organization is (i) fully insured, or (ii) “self-funded,”

i.e., an employer pays its employees’ healthcare claims

out of its general assets (rather than purchasing an

insurance policy). Furthermore, given the inherently

unpredictable nature of healthcare costs, much volatility

in the organization’s earnings and cash flows is caused,

which, in turn, has serious financial implications. First,

such volatility could cause, at a minimum, a company

or government entity to miss its profit and/or budget

expectations. In today’s environment, missing profit or

budget expectations will have significant adverse

consequences. Properly managed healthcare costs

should be one of the main priorities of an organization.

Second, volatility may also create some severe capital

budgeting problems. Thus, potential healthcare liabilities

are like a ticking financial time bomb.

In response, what, if anything, can be done? Private

companies and governmental entities have tried many

solutions: HMOs, cost-shifting to employees, restricting

access, self funding and other strategies have been

developed to manage costs downward. Unfortunately,

however, the healthcare management problem persists

and costs continue to spiral upward.

Rising medical costs are forcing changes in the way

healthcare is paid for, managed and delivered. These

changes are not just happening behind the scenes, they

require a different approach to the way you get care and

more important, how it is paid for. One Global Resources,

LLC, has spent the past 10 years developing a creative

and fully integrated model (the “OGR Model”) to handle

this problem. The OGR Model is a risk management

program, which includes a funding transaction, the

main purposes of which are to: (i) Conclusively quantify

an organization’s future healthcare liability and financial

risks; and (ii) Prefund such liability, thereby utilizing the

available cash flows to convert volatile and unknown

variable future costs into a current fixed cost obligation.

The base element of the OGR Model is a complex

mathematical and statistical software program, which

has captured detailed, demographic data on more than

22 million lives dating back to the 1950s. It is automatically

updated with actuarial and financial market factors each

month, including but not limited to, demographic

changes, medical CPI changes (including hospital

discounting, pharmaceutical trends and technology

enhancements), inflationary changes, carrier discounting

and physician contracting methodologies. All data is

compiled by state, county and region thereby ensuring

that the OGR Prefunded Model contains an updated and

comprehensive compilation of health and medical care

cost data. Furthermore, the OGRModel encompasses much

more than simply the base element: i.e., the OGR Model

doesn’t stop at merely statistically and mathematically

quantifying the upper limit of healthcare liability

exposure—it also integrates that liability amount

into an overall financial risk management tool,

discussed below.

The OGR Model is a powerful and flexible management

tool and may be implemented in the private corporate

and government organization sectors, as well as the

self-funded and fully-insured environments. The basic

steps in implementing the OGR Model are as follows:

organization’s upper limit of exposure to healthcare

costs expected in the upcoming 36-month period.

It’s important to emphasize that the OGR Model

doesn’t change the underlying substantive liability

for healthcare costs; rather, it simply quantifies

the upper limit exposure of such liability.

A funding transaction would be effected, the

specific structure of which would depend upon

whether the organization is self-funded or fully

insured in handling its healthcare costs:

is self-funded, a trust would be formed, which

would fund the net present value of the expected

healthcare exposure via either a short-term note

offering or loan transaction. The trust would

be the primary obligor of this debt, and the

Parent Organization’s employees would be the

beneficiaries of the trust.

is fully insured, the funding transaction would

be used to advance fund the insurance premiums

for the next three years, which would be based

on the liability exposure as quantified by the

OGR Model. OGR would negotiate with the

insurance carrier to discount the premiums,

consistent with the OGR Model.

The OGR Model would not change the specific

process of how the organization ultimately pays

its healthcare costs. It should be emphasized that

the OGR Model is a risk management tool,

requiring neither any changes to the organization’s

substantive administration of healthcare, nor to

the employee workforce.

is self-funded, the Trust would pay the total

healthcare costs and would service the principal

and interest on the note or loan. In particular,

the cash from the funding transaction, plus the

employee/employer contributions and investment

income would be held by the trust to pay future

healthcare costs and service principal and interest

on the note or loan. This cash would also be

reinvested in a conservative fixed income portfolio.

is fully-insured, the funding transaction would

raise money to advance fund the insurance

premiums for the next three years. Consequently,

the healthcare claims would simply be processed

through the insurance carrier in the same manner

as before implementing the OGR Model.

using various legal structures, here is a chart depicting

the general legal method:

As shown, the cash proceeds from note or loan, plus the

employee withholding and the employer contributions

and investment income keeps the trust in a fully cash

collateralized position. The trust then would pay both

variable and fixed costs and service the principal and

interest on the note or loan.

Government organizations may face additional

complexities and sensitivities relating to financing

and liabilities, which could be resolved by slightly

modifying the structure of the OGR Model, as follows.

First, a Public Financing Authority (PFA) could be

selected to actually issue short-term notes to fund

the trust. These notes would be issued “on behalf of”

the relevant governmental organization. This funded

amount would be used to pay healthcare claims.

Second, the governmental organization’s obligation

would consist of merely forwarding payments as

required under a Withholding Remittance Agreement.

Third, the relevant payments under the Withholding

Remittance Agreement signed as part of the OGR

Model could be further structured as being subject to

an “annual appropriation”, thereby preventing a liability

from arising for accounting purposes. Given no more

than an annual appropriation, no liability should be

recorded, since the issuance would be literally subject

to annual renewal by the governmental organization.

Finally, another important factor is that the annual

appropriation structure should not affect the

government organization’s debt ratios and/or debt

ratings. The OGR Model would not change financial

substance; therefore, the debt ratios should remain

unaffected. No new liabilities would be created by the

OGR Model. These strong conclusions are supported

by the fact that, in a recent $78 million deal involving

implementation of the OGR Model by Jefferson

County, Alabama, Moody’s Investors Service in

New York assigned the transaction its “Aaa” rating

(Moody’s highest rating). Moody’s assigned its rating

only after conducting an exhaustively detailed review

of the OGR Model. (For your information, a copy of

this Rating Opinion is available upon request.)

Here is a simple chart depicting the OGR Model,

implemented in the government context:

review the bottom-line advantages of implementing

the OGR Model:

unknown volatile amount into a known and

manageable fixed cost, thereby reducing the

“surprise” potential (which is punished by Wall

Street). In turn, this would reduce the volatility

in earnings and cash flows;

budgetable flat line healthcare cost for the next

36 months. Currently it is difficult for management

to budget long term for such costs, leaving a large

hole in the organization’s strategic plan;

Variable Claims

Cash and Fixed Costs

Securities

Principal and

interest on note

or loan

Employer withholdings

+

Employer Contributions

Cash proceeds

From Note or Loan

Trust

Investment

Income

Public Financing Authority

(Issued “On Behalf Of”

Government Organization)

Bond

Investors Government Organization

(School, City, County,

State, etc.)

whether the Parent Organization has a self-funded

system or is fully insured. In a self-funded

environment, the savings relate to the time value

of money held by the Trust: The liability amount is

prefunded on a net present value (NPV) basis,

while the payments out of the Trust are subject to

significant “lag” delays of filing, processing and

verifying proper employee claim payments. This

lag between receiving cash and paying claims will

irrefutably create positive cash flows for the Trust.

In contrast, if the Parent Organization is fully

insured, the insurance premium could be

renegotiated and discounted, based on the

quantified healthcare liability amount;

to implement the OGR Model. The combined

employee paycheck withholdings plus parent

organization contributions would flow directly

into the trust and remain fixed for the next 36

months. Furthermore, the trust’s cash would pay

all future healthcare costs. Thus, the great

uncertainty of dealing with healthcare costs

would be eliminated;

opportunity to negotiate long term discounts with

fixed cost providers (TPAs, Re-insurance, etc.) by

advance funding;

management strategy;

to the Parent Organization’s financial statements.

In a post-Enron business world, the market demands

complete transparency in financial reporting. The

OGR Model helps meet this requirement, since no

material healthcare financial items should be left

unknown; and

Moody’s, the OGR Model is a tried and proven risk

management tool, offering organizations the ability

to achieve favorable funding levels.