Stop-Loss Insurance As A Risk Reduction Strategy

In response to relentless benefit premium hikes, employers have increasingly been turning to self-funded health plans. According to the Kaiser Family Foundation, about 66% of all employers who provide employer-sponsored health insurance use a self-funded plan design.

A self-funded insurance plan is a way for employers to administer their employee health coverage themselves, instead of paying an insurance company to do so for them. Not only is it less expensive, but it also allows for greater plan customization, fewer regulations, and much greater access to health data compared to traditional fully-insured health insurance.

The Need for Stop-Loss Insurance

Despite its many rewards, employer self-funding brings on increased financial risk, since the company bears the full burden of supporting employee claims. This is an especially high hurdle for small companies that do not have the financial resources to support an unexpected catastrophic claim.

Stop-loss insurance coverage remedies this issue. Since one catastrophic claim has the potential to sink an entire company, stop-loss caps the maximum amount of liability an employer has in supporting employee claims. Acting as an additional layer of insurance, the stop-loss insurer reimburses the employer for claims that exceed the predetermined maximum amount.

Two Types of Stop-Loss Insurance Coverage

Stop loss is commonly offered in two forms: specific and aggregate.

specific

Specific (or individual) stop-loss policies protect self-funded employers against large, catastrophic claims from a single individual. It kicks in when an individual’s claim exceeds an agreed-upon amount for the contract year.

aggregate

Aggregate stop-loss protects against high overall claims, and kicks in when total claims for all employees exceeds an agreed-upon amount for the contract year.

Often, employers will purchase both types of stop-loss coverage together, as both are equally important in ensuring financial stability, and health claims can be highly unpredictable. Variations on the two plans, including policies that combine the two types of coverage in an innovative way (called “spaggregate” coverage) can be tailored to fit employers’ needs. If desired, it is also possible to purchase only one type of coverage. Kaiser Health’s 2017 Employer Health Benefits Survey finds that 66% of all self-funded firms purchase stop-loss insurance that includes some form of specific stop-loss policy. In contrast, 23% of firms have a “spaggregate” policy, restricting claims liability for both the individual employee and for overall aggregate employee claims.

How Does Specific Stop-Loss Insurance Work?

Specific stop-loss policies reimburse the employer when the claims of an individual employee exceed a deductible amount. This deductible usually falls between 3 and 6 percent of the expected annual claims amount per person, and can range from $10,000 to $1 million.

For example, let’s say a company elects to set a $110,000 deductible for their specific stop-loss policy. If a given employee’s claims total at $180,000, exceeding the deductible, the insurer will reimburse the company the excess claims amount of $70,000.

How Does Aggregate Stop-Loss Insurance Work?

For aggregate stop-loss policies, the employer and the insurer decide upon an aggregate attachment point, or the maximum dollar value the employer is responsible for covering in total claims in a given policy year. Once the attachment point is exceeded, the insurer will reimburse the outstanding dollar amount. The attachment point is calculated simply by multiplying the average expected monthly claims per employee per month by a percentage ranging from 110-150%.

For example, an employer may have an expected monthly claim of $370 per employee per month. The chosen percentage for coverage is 125%. Thus, the aggregate attachment factor is $370 x 1.25 =  $462.50. Next, we know the employer has 450 lives enrolled in their health plan the initial month, so $462.50 x 450 = $208,125 is the aggregate deductible for the month. Multiply this by 12 for the year, and we find the annual aggregate deductible to be $2,497,500. This value would be the maximum out-of-pocket claim for the employer if enrollment stays constant each month. Since monthly enrollment will fluctuate, the value may shift accordingly.

Aggregate policies sometimes limit coverage to a maximum of $1,000,000 or $2,000,000, and less commonly offer unlimited coverage. Given current costs of medical treatment, it can be important to find a policy that has an adequately high coverage limit.

When Does Stop-Loss Insurance Reimbursement Occur?

It’s important to note that stop-loss coverage comes in the form of reimbursement, so employers must make the initial payment for employee claims up front. For specific stop-loss policies, reimbursement may occur immediately once the deductible is reached. In contrast, aggregate claims are typically processed at the end of the policy year.

Important Stop-Loss Insurance Terms to Know

• Disclosure. Stop-Loss carriers require disclosure of any known high-risk individuals, or high claimants, before the final quote is given.
• Advance Funding. Usually, claims are funded by the employer, then submitted to the insurer for reimbursement after the fact. An advance funding policy requires the insurer to pay claims immediately when incurred, rather than reimbursing employers later on. This option can be chosen at the point of sale or at renewal, and improves cash flow for employers.
• Run-In and Run-out: These are provisions for claims either incurred or paid for outside of the policy year. Run-in reimburses claims that were incurred before the policy year began and paid within the policy year. Run-out reimburses claims that were incurred within the policy year but paid after the policy year ended.
• Lasering: Carriers often place a higher deductible on certain individuals, or exclude them from coverage altogether, a practice called lasering. Oftentimes, this carving-out of specific employees from coverage is done by the carrier at the renewal of the policy.
• Terminal Liability: A stop-loss policy provision that lasts beyond the termination of an employer self-funded plan. Under terminal liability, employers have coverage for claims that are paid up to three months after the end of the policy.

A Stop-Loss Insurance Policy for Everyone

Stop-loss insurance isn’t health insurance — it’s financial reinsurance for health insurance outlays. This means stop-loss insurers are not accountable to mandates under ACA or state law. Thus, it is important to be aware of potentially expensive gaps in coverage instituted by a stop-loss insurer, and to negotiate accordingly.

“Lasering” is a prime example of a practice that is forbidden for health insurers, yet acceptable for stop-loss insurers. Stop-loss carriers can restrict coverage for specific high-risk employees or even specific health benefits that are considered essential.

Close examination of a proposed stop-loss policy is the best way to avoid these potentially costly gaps in coverage. It’s essential to know exactly who is covered by the plan, what kinds of procedures are included, and what types of changes to the agreed-upon contract, if any, are allowed mid-year.  

In addition, a stop-loss policy should fit the workplace it serves. Historical claims data, risk-tolerance, and employee demographic information should all be utilized to empower predictive analysis, leading to the best stop-loss protection based on data-driven workforce trends information. Knowledge on risk levels and risk tolerance can come together to help employers choose the appropriate level of stop-loss coverage. Health analytics tools, such as Springbuk, use data that is readily accessible to self-funded employers to provide these critical insights.

The Market for Stop-Loss Insurance

A Milliman white paper found that 83% of carriers considered stop-loss a focused area for growth in 2017. Increased market growth and competition is driving brokers and consulting firms to expect better performance from stop-loss carriers. Provisions that shift risk held by the employer back onto the carrier, such as no-new-laser contracts and advance funding, have become increasingly popular. Key distributors of stop-loss protection are learning to tailor to employers’ needs, making it a good a time as ever to jump on this valuable cost-saving tool.

The Rise of Stop-Loss and Self Insurance

For a long time, self-funded insurance was considered inaccessible to smaller employers. The Department of Health and Human Services reports that 80% of businesses with over 500 employees self-insure, as compared to fewer than 30% of businesses with 100-499 employees. Stop-loss insurance is the ultimate equalizer, providing the opportunity for businesses of any size to start taking control of their own health benefits design and thereby achieve happier employees who are satisfied with the coverage they receive.

With monthly premiums rising incessantly, claims amounts higher than ever before, and regulations under the ACA in flux, businesses are flocking towards self-funding and stop-loss insurance. Furthermore, with the rise of an increasingly consumer-driven, technologically converging health insurance playing field, self-funding allows businesses the freedom to integrate innovative technologies such as telemedicine and concierge services as powerful cost-savings tools. Taking first steps into the future of benefits coverage is only possible when you have the financial and administrative freedom to do so. More and more, it seems that the best way to ensure employee happiness with a health care plan is to design and implement it yourself.

Looking to improve your company employee benefits and contain your healthcare costs? Schedule a HealthJoy demo today.

References
https://www.kff.org/report-section/ehbs-2017-section-10-plan-funding/
http://www.spencerjamesgroup.com/what-is-stop-loss-insurance/
https://www.springbuk.com/our-insights/self-funding-stop-loss-coverage-using-data-to-improve-roi-cash-flow
https://www.springbuk.com/how-to-ensure-your-stop-loss-policy-adequately-covers-your-population
http://us.milliman.com/uploadedFiles/insight/2017/Employer-Stop-Loss-Survey.pdf