Choosing to self-fund a group health plan has major financial implications for a plan sponsor because it is ultimately responsible for paying all legitimate medical claims that arise. As a result, many self-funded plan sponsors purchase stop-loss insurance (also called excess-loss insurance or reinsurance) to help mitigate this risk. The policy is designed to reimburse the plan sponsor for claims exceeding predetermined levels.
Here are five important considerations for plan sponsors when purchasing or renegotiating a stop-loss policy.
- Choose the Right Type of Deductible
Each stop-loss policy sets a deductible, which is the claim amount threshold (also called an attachment point) that, once exceeded, will trigger reimbursement from the stop-loss carrier.
A specific deductible sets an attachment point per plan participant and reimburses a plan sponsor once the health claims of an individual exceed the attachment point during a certain period. An aggregate deductible is met when the total combined claims of all plan participants reach the predetermined attachment point during a certain period. An aggregate deductible typically requires specific stop-loss insurance to also be in force.
Plan sponsors will need to determine which combination of deductibles is right for them. Specific deductibles are designed to protect against catastrophic claims, whereas aggregate deductibles protect against unexpected overutilization of the health plan. According to the 2020 Employee Benefits Survey, it is most common for plans to utilize a blended deductible arrangement instead of only purchasing specific coverage.
2. Set the Right Attachment Point
A general rule of thumb is that the stop-loss policy premium will decrease as the attachment point increases. For example, a $100,000 specific deductible may average around $169 per participant per month, whereas a $500,000 specific deductible may only cost about $32 per participant per month.
The plan sponsor needs to determine its capacity for paying claims. Is the plan funded such that it can pay a $500,000 or $1 million claim without reimbursement? Plans with lower reserves or that anticipate increased plan usage may need to pay higher premiums for a lower attachment point so that they are supported by reimbursements through the stop-loss policy.
3. Establish a Reasonable Coverage Period
A self-funded health plan sponsor must carefully consider the time periods in which reimbursements will be paid. Reimbursements may be paid based on when the claim is incurred or when the plan sponsor paid the claim. In either case, the period may be limited to the 12-month plan year or may be extended for longer (usually 15 months). For example, assuming a plan year running from January 1 to December 31, 2022, a 15/15 contract would have an incurred period from October 1, 2021 to December 31, 2022 and a paid period from January 1, 2022 to March 31, 2023. The cost of a policy will vary depending on how many months are covered prior to or after the plan year. A plan sponsor should look for trends in historical claims data to determine which coverage period is appropriate.
4. Negotiate Lasering
A stop-loss insurer may laser a high-risk participant who is more likely to incur extraordinarily high medical claims (e.g., hemophilia patients, cancer patients or children with rare illnesses who are likely to remain on the plan for a long time). This means the insurer either curtails or refuses to offer stop-loss coverage to the plan sponsor for that participant or will only provide coverage if the plan sponsor accepts a higher specific deductible for that participant. An insurer may laser a participant for the first year of coverage, or indefinitely, in accordance with the agreed-upon terms of the contract. A plan sponsor may pay a higher premium for a “no new lasers” provision that would prevent the insurer from adding any new lasers at the next renewal. (Note that this type of provision is only for the next renewal period and not forever.)
After reviewing these alternatives, a plan sponsor considering whether to self-fund its health plan might determine that it cannot afford stop-loss premiums or the risk of high claims at all and fully insure the plan instead.
5. Ensure That the Stop-Loss Policy and Plan Document Align
When a stop-loss carrier submits a proposed policy, the plan sponsor should read the entire contract carefully to ensure that it aligns with the provisions of the health plan. For example, some stop-loss policies may exclude classes of people—e.g., COBRA enrollees, retirees, domestic partners and inactive employees on leave or disability—whereas the health plan will still cover them. Alternatively, a health plan might cover certain treatments, like experimental cancer treatments, but the stop-loss policy does not. It is critically important that the group health plan coverage mirrors the stop-loss insurance coverage to ensure that catastrophic claims will be reimbursed. In addition, before a plan sponsor makes changes to its health plan that are more generous than its current provisions, it should confirm that the stop-loss policy will reimburse claims resulting from these changes.
Learn More
This just scratches the surface! Enroll in the new online Certificate in Self-Funding Group Health Plans to take a deeper dive into this and other considerations like cost-containment strategies and plan administration.
Rose Plewa, CEBS
Senior Instructional Designer, Online Learning Department at the International Foundation
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