Advice for self-insured health plans: Don’t buy stop-loss on price alone
The Patient Protection and Affordable Care Act is making self-insurance more feasible as some of the additional costs required by insurers to comply seem excessive at 2-4% of insured premium. Self-insurance is seen as a means to reduce costs when insured loss ratios have consistently been low (typically less than 80%). Insurers continue to deem smaller and smaller groups 100% credible, so when claims are the primary driver of premiums, it makes sense to evaluate self-insurance.
For employers who choose to self-insure, they must evaluate who will process their claims and, in most cases, who will provide stop-loss reinsurance protection. Unfortunately, too many employers (and their advisors) view stop-loss protection simply as a commodity and that all policies are the same. Buying based on the lowest price without getting all the details, or taking info consideration the next renewal can be costly. I share with you some cases that illustrate my point:
A client knowingly selected a stop-loss program that covered claims that were “paid” for only three months after the plan year, this is referred to as a 12/15 contract. When a large hospital claim occurred in late December, a carrier audit process was triggered which resulted in a claim payment of $280,000 in early April, 4 months after the plan year-end. The company incurred the entire liability on that claim that would have been covered under a richer paid contract.
Quite recently, a self funded company prepared for the renewal process, having recently learned of a large, ongoing $1 million a year claimant. The carrier carrying the stop-loss on the program decided to exercise their right to “laser” the claimant, creating a 100% exposure on the costs of the ongoing claim. Given that there was a large ongoing claim, no other market existed for the company. Given the carriers a layering right will reduce the premium, but it is a dangerous proposition when a large claim actually hits.
I have many more stop-loss nightmare stories, but the lessons are clear: carefully consider your options, the policy provisions and the cost/benefit of different stop-loss structures. A quick list of the key things to consider:
- Specific deductible levels and do you have the cash flow to pay a big claim.
- Aggregate stop-loss can protect you, but a cheap policy may be based on unrealistic expected claim targets.
- Gaps in coverage due to incurred and paid periods or not having a terminal liability option.
- Lasering – some policies state no lasers on renewal, but not all. You may pay a bit more for this provision, but it may be worth it.
- Does the policy cover prescription drugs? Not all do
- How does the policy tie into the health plan summary plan description?
- How long does it take claims to be paid can vary a lot
WGA has a team of stop-loss experts to help guide the self-insured through this complex topic. If you are currently self-insured or thinking about it, please talk to us. It may save you from a future bad situations.
William Gallagher Associates is a leading provider of insurance brokerage, risk management and employee benefits services to firms with complex risks and dynamic needs, within industries that include technology, life sciences, financial risks, health care, renewable energy & clean technology, and environmental services. WGA has offices in Boston, MA; New York, NY; Hartford, CT; Princeton, NJ; Columbia, MD; and Atlanta, GA.