The Patient Protection and Affordable Care Act is making some employers take a look at self-funding their medical plans since some of the costs to comply for fully insured plans add 2-4% to the premium on top of the double-digit increases they would be getting anyway. Self-insurance can help reduce overall costs if your employees are relatively healthy and your medical loss ratios has consistently been low (typically less than 80%). Stop-loss insurers of late have been willing to consider smaller companies (some will insure under 100 employees). For employers who choose to self-insure, they must evaluate which network to use and who will process the claims (a third party administrator (TPA) or an insurer who will ‘rent a network’). Additionally, you will need to evaluate who will provide stop-loss reinsurance protection.
For those of you unfamiliar with self-funding or stop-loss insurance concepts, here’s how it works. The TPA will process claims as they come in. The employer pays the claims through the TPA (to comply with HIPAA). Typically, you are able to save money just on the difference in administration costs between the TPA and your insurance company. For added protection, you should purchase stop-loss insurance. Stop-loss insurance does what it says. It stops the loss (of dollars) when there is a big claim. This is especially important if cash flow can be an issue for your company. There are two types of stop-loss coverage and I recommend having both. The first is Specific Stop-Loss, sometime referred to as “Spec”. If a single large claim comes in, say a heart bypass surgery for $250,000, the spec coverage will limit the employer’s portion of the claim. The employer can choose the level that they will be able to fund ($50k, $100k, etc.) and the stop-loss insurer will pick up the rest. Obviously, the higher level the employer chooses to be responsible for, the lower the cost of the insurance. The second type of stop-loss coverage is Aggregate Stop-Loss, or “Agg”. This protects the employer from paying out claims for the plan year once a certain total claims level is reached. This is usually expressed as a certain percentage over your expected claims volume, also referred to as a “corridor”.
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 of the policy details can be costly. I will share with you some cases that illustrate my point: A company I’ve been speaking with selected a stop-loss program that paid claims up to three months after the plan year, this is referred to as a 12/15 contract, which means that the insurance will cover all claims incurred in a twelve month period AND that are received in the 15 months from the start date. When a large hospital claim occurred in late December, a carrier audit process was triggered which resulted in the claim of $280,000 not being paid until early April, four months after the plan year-end and one month after the stop-loss contract provision. The company incurred the entire liability on that claim because although it was incurred during the plan year, it was not paid until after the 15 month period of the contract had expired. Had the company chosen a longer term contract (with a slightly higher premium) they would have been able to limit their payout to the “spec” limit, which in their case was $50,000.
Here’s another. A self-funded company was preparing for the renewal process, having recently learned of a large, ongoing $1 million a year claimant. The carrier providing the stop-loss on the program decided to exercise their right to “laser” (Dr. Evil finger quotes) the claimant, meaning that it would not provide stop-loss coverage for that employee. Given that there was a large ongoing claim, no other carrier would touch this company. Giving the carriers a lasering clause will reduce the premium, but it is a dangerous proposition when a large claim actually hits.
Here’s a quick list of questions to ask when considering self-funding:
- What specific stop-loss level would you be comfortable with? Do you have the cash flow to pay a big claim?
- What aggregate stop-loss level are you comfortable with? Is your expected claims projection realistic?
- How long should incurred and paid periods be? Choosing a short paid period could be costly.
- Lasering – some policies state no lasers on renewal, but not all. Are you willing to pay for that protection?
- Does the policy cover prescription drugs? Not all do.
- How does the policy tie into your health plan’s summary plan description?