Voluntary Benefits Special Report

Stop loss health coverage protects self-insureds

Self-insuring health risks expands to smaller firms

By Dave Willis

In 2010, Middletown, Connecticut, a city of some 43,000 residents, faced the prospect of a 20%+ health insurance renewal rate increase, along with other economic challenges. City leaders explored alternatives, including negotiating with the incumbent insurer and with city unions, but none of the options provided sufficient savings, according to a news release issued by the city's mayor.

So Middletown leaders decided to switch from fully insuring the city's medical program to self-funding it. The move, coupled with certain other plan design changes and a higher employee contribution rate, led to what the mayor describes as a first-year savings to city taxpayers of more than $800,000.

Middletown is not alone in self-funding its health care costs. According to The Kaiser Family Foundation 2009 Employer Health Benefits study, 57% of covered American workers were enrolled in some sort of partially or fully self-insured health plan. Employers who self-insure bear some or all of the risk for paying claims. They generally tap third-party administrators (TPAs) to administer the plans and often purchase what's called stop loss coverage to protect against unusually large payouts.

A brief prepared in December 2010 by The George Washington University's National Health Policy Forum says, "In 2014 and beyond, smaller employers with relatively healthy workers that have low medical costs may find it financially advantageous" to self-fund their health plans. The shift—and suggested timing—relate to changes called for in the Patient Protection and Affordable Care Act (PPACA) that Congress passed in 2010.

According to the brief, titled "Self-Insurance and the Potential Effects of Health Reform on the Small-Group Market," employers that self-fund their plans are explicitly exempted from some PPACA requirements. The National Health Policy Forum paper describes the exemptions as follows:

• Individual and small-group plans are required to participate in a risk-adjustment system, but self-insured plans are exempt.

• Self-insured plans are not subject to provisions (specifically, medical loss ratio requirements and review of premium increases) that are intended to limit insurer earnings.

• Starting in 2014, health insurers are required to pay an annual fee to be calculated by the Secretary, but self-insured plans do not have to pay this fee.

Another benefit specifically affects employers with operations in more than one state, says Michael Sullivan, president and chief operating officer, HM Insurance Group. "The fact that self-funded plans are under ERISA (The Employee Retirement Income Security Act of 1974) allows employers to operate a single plan that covers employees in multiple states, so there's an added level of flexibility that they provide," he notes.

Self-funding and stop loss

According to Sullivan, smaller employers have already taken note of self-funded plans and the potential benefits they offer. "Self-funding of health benefits has always been pretty robust in the mid-sized and larger group markets—employers with 500 employees and above," he says. "Today, we are seeing a significant interest in self-funding and, as a result, stop loss insurance, in smaller groups, too."

Stop loss insurance is a way to transfer some of the employer's risk to a carrier. "Stop loss can offer specific coverage for any large individual claim on a single covered member, as well as aggregate coverage for the total claims liability for the group over a period of time, typically 12 months," Sullivan notes.

Specific stop loss insurance—or individual stop loss, as it's sometimes called—is designed to protect plan sponsors against catastrophic claim occurrences. The protection responds when an individual insured through the plan has a covered event that exceeds a pre-defined stop loss deductible.

Aggregate stop loss coverage limits the overall exposure for a given policy period—often a year—and is designed to help minimize the financial impact of an unusually high number of claims among group members. It protects the employer when the number—and cost—of routine claims exceeds plan projections.

According to Sullivan, stop loss coverage can be tailored to meet the employer's level of risk tolerance. "We can use a range of deductibles, contract periods and other features to structure a plan that reduces potential claim risk for employers of all sizes—from small to large," he explains. "We can build a product that eases cash-flow concerns and takes away the need for employers to worry about potential large losses."

For employers wishing to switch back to fully-insured coverage, the carrier offers an option that extends the stop loss insurance for a period of time following policy termination. "This lets the employer buy out the future risk," Sullivan notes. "However, it's rare for employers who get into self-funding to ever go back to being fully insured."

Staying up to date

Following passage of health care reform legislation, Sullivan's firm revamped its offerings. "We now incorporate dependent coverage to age 26, and we offer the option of no annual limits, no lifetime limits where allowed, and no pre-existing condition limitations," he notes.

These changes ensure compatibility between stop loss and underlying coverages, something Sullivan says is critically important. "As underwriters, we are very careful about looking closely at the underlying benefits plan," he explains. "We certainly don't want an employer to find out after the fact that there's a gap in coverage. That would be disastrous."

According to Sullivan, the company moved quickly to respond to regulatory changes because of the sizeable role stop loss insurance plays in his company's overall product mix. "Stop loss is our core business—our leading product line," he explains. "We insure about $650 million of stop loss business. To maintain our strong position, we spend a lot of time on product innovation.

"Much of that effort centers on finding new ways to expand the self-funded marketplace, particularly in the smaller group markets," he adds. "Traditionally, employers in those markets—and for that matter, the agents and brokers who serve them—have been hesitant to make use of self-funding and stop loss insurance."

Much of this reluctance stems from lack of understanding. "They're not as familiar with how self-funding works and how stop loss can really protect their potential financial liabilities when self-funding," Sullivan explains. "So we've been working to come up with products and practices that help those smaller groups and their advisors look more favorably at self-funding."

Driving engagement and education

Part of this involves working with TPAs and understanding how discounts in networks they use compare to the national carriers. "Often, the differences in discounts between local hospital-based networks and the large, national players are getting smaller. Having a true understanding of these discounts helps us to accurately price the stop loss insurance and ultimately set controls around the employers' overall risk."

Sullivan's firm also offers a variety of funding mechanisms that help with cash flow—something that's especially important for smaller employers. "We have a monthly accommodation feature that allows us to insure them for an unusually large volume of claims in a given month and then true it up month to month and again at the end of the year. This offers them even broader cash-flow protection.

"Another aspect is coordinated reimbursement of large specific claims on one individual," he adds. "For instance, if a small employer has a $50,000 stop loss deductible and a million-dollar claim occurs, coming up with $950,000 and then waiting to get reimbursed could present significant burden." With coordinated reimbursement, the stop loss carrier can step forward and make a payment before the employer is out the $950,000. "For a smaller, 100- or 200-life employer, having to make such a large payment on their own could be catastrophic. This option does vary by state regulations," Sullivan adds.

The carrier also works with TPAs and employer groups to support wellness programs and customized plan design. "Typically, employers can control costs by structuring wellness initiatives and plan design to meet the needs of their own population, as opposed to how it works with fully insured plans, which address the general population," Sullivan says. "For instance, with a younger employee base, employers could focus on weight management and smoking cessation rather than kidney disease or more chronic illnesses."

With more than two-dozen offices around the country, HM Insurance Group provides direct support and education to agents and brokers, and also works through trade associations. "We do a number of programs with the local health underwriter association chapters throughout the country," Sullivan says. "Also, we're actively involved with The Self Insurance Institute of America and The Society of Professional Benefits Administrators and their education and outreach efforts."

Opportunities for agents

Sullivan encourages local agents and brokers to make use of those associations. "Each of these organizations offer a broad range of education and other materials that can help agents and brokers get up to speed on self-funding and stop loss," he says. "Of course, agents should also feel free to contact the local group representative of any of the big stop loss carriers. We're always willing to help agents that want to understand more and learn how self-insurance and stop loss might help their clients."

According to Sullivan, some agents and brokers may already have a built-in comfort level, even if they're not involved in self-funded health plans—or any health plans, for that matter. "In the casualty world, there is a rather large appetite for self-funding of workers compensation and other casualty lines," he says. "Agents and brokers who are involved in these programs already have a good understanding of self-funding in its broadest perspective. It's just a matter of applying the principles to health insurance."

Sullivan says addressing health insurance self-funding and stop loss coverage can be a foot in the door for agents and brokers who want to pursue the opportunity. "In certain markets around the country, self-funding is not as prevalent as it is in other markets," he explains. "And it's certainly something new to talk about with smaller employers virtually anywhere.

"Any opportunity to bring stability and potential cost-savings to health insurance will catch an employer's ear," he adds. "Those businesses that already self-fund their workers comp and fully fund their health insurance would probably be prime targets. These employers understand the benefits of self-funding. It's just a natural extension of something they already do."

According to Sullivan, the biggest challenge agents and brokers will face is the one that's held people back all along. "A lot of employers are unfamiliar with the concept and, as a result, they're fearful of it," he notes. "What they need to understand is that self-funding provides an incredible amount of flexibility, and stop loss insurance reduces the fluctuations and provides an added layer of comfort.

"As employers realize the benefits they can achieve through greater plan control, more focused wellness initiatives and more comprehensive and relevant data, you'll see an even greater move to self-funding," he adds. "Stop loss can remove an element of uncertainty and let the employers address their own needs and the needs of their workers.

"As they realize the financial advantages and the flexibility the plans provide, they'll find it's a better overall solution," he adds. "Agents and brokers can benefit by understanding the product and helping their clients—and prospects—see how self-funding and stop loss insurance can meet their needs."

The author

Dave Willis is a New Hampshire-based insurance freelance writer and regular Rough Notes magazine contributor.