3 Things You Might Not Know About Stop-Loss But Definitely Should
Self Funding health benefits is a way for many employers to reduce cost and have more control over the benefits they offer to employees. For most groups that self fund, stop-loss insurance is a must. Aggregate stop-loss coverage sets a maximum amount that the group will incur in claims cost for the year. Individual stop-loss coverage limits the impact that any one member’s healthcare use can have on claims cost. These two together can be designed to match up the probability distribution of claims liability with the risk tolerance and budgetary needs of the employer.
The ins and outs of stop-loss coverage can be complicated to a health broker when first working with self funded groups. Even experienced consultants might not know everything they should to best advise their clients. With that in mind, these are three things that you might not know about stop-loss but should for the good of your clients.
1. An aggregating-specific deductible can be utilized to save money, sometimes without any additional risk. An aggregating specific deductible is an amount of claims above the individual stop-loss deductible that the group pays before reimbursements begin.
For example, a policy with a $75,000 specific deductible and $40,000 aggregating-specific deductible would cap the group’s liability for each individual member at $75,000 but the first $40,000 in breaches would be paid by the group. So if there are two large claims of $100,000 and $120,000 the total amount above the specific deductible is $70,000, the first $40,000 is paid by the group and the net reimbursement from the stop loss carrier is $30,000.
The premium reduction that comes with an aggregating-specific deductible is often near to or more than the deductible itself. In other words, in our example, the stop-loss premium may be reduced by $45,000 with the maximum additional cost of $40,000. This is a no-brainer for the employer. More commonly the reduction in premium would be around $37,000. In this case the group would at worst pay an extra $3,000 but if no large claims are incurred during the year the group would pocket the $38,000. Groups that expect to grow during the year will find that the reduction in premium for the full year ends up being more than shown on the renewal or quote. This feature on a stop-loss policy, when not a no-brainer, requires some cost modeling but is very frequently a good option for the employer and stop-loss carriers do not typically offer this feature unless it is requested.
2. A stop-loss policy can be on an incurred or paid basis. The majority of groups utilize a 12/12 policy in the first year of self funding. This means that their policy covers claims that are incurred in 12 months (the first number) and paid in 12 months (the second number). So a group first self funding in 2018 would have a policy that covers claims incurred 1/1/2018 through 12/31/2018 and paid 1/1/2018 through 12/31/2018. Then in years 2 and beyond the policy moves to a 24/12 or a PAID basis, meaning all the claims paid during the policy year are covered by the stop-loss protection.
An alternative to this standard approach is a policy that works more closely to an incurred basis. With this strategy, in the first year of self funding and in each subsequent year a 12/18 policy (or similar) is utilized. So claims incurred 1/1/2018 through 12/31/2018 and paid 1/1/2018 through 6/30/2019 are covered. This closely matches to how fully insured coverage works as far as date of service and payment goes. Terminal Liability coverage with a 12/12 policy can be designed to create similar coverage on an incurred basis.
There are some positives and negatives to each of these approaches to stop-loss protection. An incurred policy basis makes for easier movement between stop loss carriers or back to fully insuring benefits. This is due to there not being any claims liability left uncovered at the end of the policy year. It also better aligns cost and protection with the liability of the employer and their fiduciary responsibility. However, an incurred policy basis leads to a lengthy settlement delay as the ultimate reimbursements due to the employer are not known until 6 months or more after the end of the policy year.
A 12/12 first year policy followed by PAID coverage creates some cash flow savings in the first policy year. However, it is important to recognize that these first year savings are to cash flow and not to liability or cost incurred. It is important when comparing a 12/12 policy’s cost to fully insured premiums or other funding options that IBNR reserves are added into the 12/12 policy cost in order to make a fair, apples to apples comparison. A 12/12 attachment point will be lower than a 12/18 attachment point but the actual claim liability paid by the employer and the timing of those payments is exactly the same. Making sure that a proper cost comparison is made and that the employer understands the risk associated with self funding regardless of the policy basis used is paramount to successful benefits funding.
3. Aggregate Accommodation can be purchased to alleviate concerns over the short-term variability to cash flows for employers moving to self funding. Aggregate protection sets a maximum claim liability that the employer will pay during the policy year. At the end of the year, the claims paid by the employer are compared to the attachment point set in the stop-loss policy and if the group paid more than the attachment point a refund is made in the amount above the attachment point. But what if the claims are quite high in the first few months of the policy and the employer is not prepared to cover this cost and wait until the end of the year for a potential refund?
Aggregate Accommodation is the solution to this potential pit-fall. Usually for a very small fee, the stop-loss carrier will compare the year-to-date attachment point to the claims paid by the group and issue a refund if warranted at the end of each month. This means that the group does not have to wait until the end of the year for a refund and their claims liability at any point during the year is capped by the attachment point built up to that point. The aggregate accommodation feature does not lead to a reduction in claims liability but instead simply adjusts when the claims are funded during the year in the event of a mid-year attachment point breach. This is often important for smaller groups or for groups that have tight budgeting requirements.
If you have questions about self funding or would like assistance in analyzing the funding options of a group feel free to contact me at bvernon@benefitinnovators.com or message me on LinkedIn.