Strategies for Crafting Stop-Loss Contracts

January 10, 2019 11:52 am

The traditional solutions for healthcare companies that opt to self-insure their employee health plans are quickly becoming antiquated in today’s challenging environment. Rising medical and drug costs, along with a dramatic spike in multimillion-dollar claims, mean that organizations seeking to self-insure could be taking on too much exposure.

A crucial element of a self-funded plan is stop-loss insurance, which protects against large, catastrophic claims that can derail health plan budgets. Despite its importance, however, this element often is only an afterthought in the myriad decisions companies face when structuring their employee health plans. 

Healthcare Costs on the Rise

The number of patients with million-dollar-plus claims rose 87 percent in three years, from 104 in 2014 to 194 in 2017, with most charges ranging from $1 million to $1.5 million, according to a 2018 research report on high-cost claims and trends in injectable drugs issued by Sun Life Financial. The sharp increase in claims frequency and severity is raising risk significantly. The Affordable Care Act (ACA) eliminated lifetime limits, and as a result there have been multiple claims reported in excess of $10 million.

Specialty drug costs also are soaring with the expansion of high-cost targeted medications for rare and chronic diseases such as hepatitis C, cancer, hemophilia, and rheumatoid arthritis. As a result, self-insured employers and health plans are seeing annual claims just for prescription drugs reach dollar amounts of six to seven figures on a regular basis. 

With the increasing complexities of today’s medical treatments, stop-loss contracts are not a one-size-fits-all solution, especially for healthcare organizations. 

The Opportunity for Customized Stop-Loss Coverage

A wide variety of contract options and riders are available to help with cash flow, risk tolerance, and long-term claim situations. Although competitive premium rates are important, cost should not be the only factor in buying a stop-loss plan. 

Brokers and consultants who specialize in stop-loss contracts for healthcare organizations can build in several provisions that are key to protecting the financial health of the plan assets.

Laser. The stop-loss carrier may impose additional liability on one or more individuals on a group plan, anticipating ongoing large claims (which typically makes sense on known risks). With a no new laser (NNL) provision, the stop-loss carrier cannot apply new assessments at renewal. This provision gives the self-insured plan more stability and predictability, as well as fewer surprises if the amount in claims experienced during the year was unusually high.

Rate cap. Often combined with the NNL, a rate cap places a maximum increase that the stop-loss carrier can impose at renewal, regardless of claims experience, unless there are material changes to the plan. 

Plan mirroring. Although an employee benefit plan and a stop-loss policy are separate documents containing different provisions and terms, they should complement one another. Stop-loss coverage should mirror the underlying health plan. Without plan mirroring, audits by stop-loss carriers can result in gaps in coverage. Aligning the definitions, provisions, and/or eligibility rules of the underlying plan and the stop-loss contract can prevent significant claim reductions or denials. 

Claims basis. Although every plan is different, most self-insureds should choose a policy with a significant run-in or run-out period. Doing so allows the policy to provide coverage for the lag time between the date the medical service is provided and when the claim is paid and reported to the stop-loss carrier. Stop-loss contracts typically cover claims incurred and paid within their 12-month policy, but the terms for covering run-in and run-out differ greatly. Because large claims tend to be complicated, they can take additional time before being adjudicated. 

Dividend-eligible policies. Such provisions allow for a refund on a portion of the premium if reimbursed claims fall at or below a certain level. Dividends vary by carrier, but after a certain loss ratio is met, an employer could receive anywhere from 15 to 50 percent of the carriers’ profit. Dividends often are capped to a maximum percentage of the premium.

Alternative funding. Most healthcare organizations are not aware that there are other funding mechanisms available besides paying a standard monthly rate. Such options can significantly reduce an organization’s insurance premium expense and better align risk tolerance with cash flow. 

Captives (offshore or on shore). Healthcare organizations can use their own captive insurance company to better finance stop-loss coverage and claims reimbursement.  

Healthcare specialists. Healthcare organizations should consider using specialty healthcare stop-loss underwriters. These stop-loss insurers, along with a healthcare specialty broker or consultant, can design programs that are superior to traditional programs. 

There are unique opportunities available to enhance coverage, reduce premium, limit liability and better protect the assets of the self-funded budget. 

Chris Williams is senior vice president, Risk Strategies National Health Care Practice, Nashville, Tenn.


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