Assessing the Latest Trends in Stop-Loss Coverage
If your organization self-insures its health care plan, you’re no doubt familiar with stop-loss coverage. If, instead, you’re considering self-insuring to gain more control of your health benefits’ design and administration — and possibly even save some money to boot — it’s important to understand how stop-loss coverage works before you decide.
In either case, stop-loss veterans and newbies should stay on top of the latest trends in this backstop risk management product.
For the uninitiated, stop-loss coverage can be viewed as health care insurance with a deductible as high as Mt. Everest. It’s sold both on a standalone basis by several insurers and in conjunction with some health plans.
Stop-loss coverage kicks in once an individual claim and, if the policy is designed accordingly, aggregate claims each year reach a contracted threshold known as the “attachment point.” (Note: Self-insurance generally isn’t economically advantageous for employers with fewer than about 75 employees.)
Typically, the larger and more profitable the employer, the higher the stop-loss deductible and attachment point. This is because larger employers usually are less financially vulnerable to the impact of the occasional catastrophic medical claim. The same principle applies to the purchase of stop-loss coverage that covers only individual claims — known as “specific” coverage — instead of a package featuring both specific and aggregate claims protection.
Data from Milliman, a leading actuarial consulting firm, indicates that most employers with at least 1,000 employees opt for specific coverage. In contrast, 83% of self-insured employers with 250 or fewer employees opt for stop-loss policies that cover specific and aggregate claims.
Let’s make a deal
Aggregate claims protection typically works like this: You and your broker or claims administrator agree on an estimate of what total claims will be in the upcoming year, based on your recent claims experience. Let’s say it’s $1 million. The aggregate stop loss attachment point generally will be set at 125% of that amount — that is, claims will be covered when you have already paid out $1,250,000.
There can be a complicating factor, however, known as a “laser.” A stop-loss carrier, or you, might decide that an employee with a high medical risk profile needs to be “lasered” out of the terms that apply to other employees covered by the stop-loss policy. Instead, the employer is on the hook for a much higher amount before stop-loss protection kicks in. You might request a laser to lower your premium, or the stop-loss carrier might demand it to manage its risk.
What’s a typical specific coverage amount? As with the decision of whether to include an aggregate claims limit on your stop-loss coverage, the answer generally varies according to employer size. Milliman data indicates that around 43% of stop-loss buyers pick an attachment point for individual claims at below $250,000 (of which 15% set the limit below $75,000). The rest set higher limits.
There’s no “free lunch” with stop-loss insurance. Basically, it’s a question of how much financial protection you’re willing to pay for. Going with a higher attachment gets you lower premiums. For example, a premium per covered employee with a $100,000 deductible might be around twice as high as it would be for one with a $200,000 deductible, and more than five times as high as one with a $500,000 attachment point.
More nuanced approach
If you want to take a more nuanced approach, stop-loss carriers typically allow you to aggregate all your specific deductibles and take on an additional fixed amount of risk for individual claims (above the deductible amount) until a supplemental “risk pool” of your own funds is exhausted. The effect is to raise the deductible for individual employees until the limit is hit. The math works out differently with this approach than a standard aggregate claim limit.
Whatever deductible strategy you choose, you’ll typically come out ahead if your losses are lower than the stop-loss carrier predicted. But the price you’ll pay for stop-loss coverage, no matter where you set the deductible amount, can trend upward or stabilize based on competition and claims experience within the stop-loss industry.
Lately, many stop-loss carriers have been getting squeezed by total claims that have exceeded their expectations. Only around one in five stop-loss carriers came in as they expected, about 60% did worse, and the rest paid less in claims than they were anticipating. (That doesn’t mean those who bet wrong all lost money, though.)
Even in a competitive market environment, there’s a limit to how much punishment an insurer will settle for in disappointing financial performance. Pressure has been building for premium increases.
In response, many stop-loss carriers have been adding a new feature to their offerings: guaranteed limits on how high they’ll hike their premiums in the next year. Sometimes this feature is offered in conjunction with a pledge not to “laser” any more employees in its contract offers for the following year.
However, rate increase cap guarantees might offer only cold comfort, as those ceilings are typically set at 40% or 50%. What’s more, stop-loss premiums might add up to only around 10% of your total health care plan cost. Still, in that case, a 50% jump in your stop-loss premium would translate to a 5% addition to your total health plan cost, probably on top of rising costs attributable to the ever-escalating prices of medical services and prescription drugs.
Another trending product feature you might encounter is “specific advance funding.” This is a promise to front you cash on an expedited basis to help promptly pay claims that exceed the deductible amount without having to undergo a more time-consuming procedure.
As you can see, stop-loss coverage has many moving parts. And, of course, the health care industry itself is in a constant state of flux in terms of pricing, rules, regulatory proposals and so on. With several months to go before you’ll need to renew a calendar-year contract, now is a good time to re-evaluate your existing stop-loss coverage or closely examine the idea of acquiring such coverage.
Sidebar: Top 10 health conditions subject to stop-loss insurance claims
- Malignant tumors
- Leukemia, lymphoma and/or multiple myeloma
- Chronic / end stage kidney disease
- Congenital anomalies
- Transplant surgery
- Newborn with a catastrophic condition
- Complications of surgical and medical care
- Hemophilia/bleeding disorders
- Cerebrovascular disease (such as a stroke)