There has been a lot of interest in plan sponsors using self-insured health plans since the passage of the Affordable Care Act (ACA).
In the majority of cases, self-insured plans are cheaper for employers than fully insured plans. For example, fully insured carrier premium taxes in some states are half a percent or more; state taxes are paid at a different rate for self-insured plans. In addition, if an employer is fully insured using a health insurance provider, it may pay that provider $1 million in premiums. If the employer moves to self-insure, it won’t pay such a large premium to an insurance provider, but self-insured health plan sponsors typically buy a stop-loss policy to cover catastrophic claims.
There are two major forms of stop-loss insurance.
- Individual or specific – Specific stop-loss insurance sets a threshold per participant above which the stop-loss insurer will cover claims. For example, an employer can purchase stop-loss at a $100,000 threshold per participant for claims paid in a certain policy period. If an individual’s claims exceed $100,000, then the stop-loss carrier is responsible for the amount greater than $100,000.
- Aggregate – Aggregate stop-loss insurance protects the employer against total claims paid liability. The organization’s liability is expressed in terms of a percentage of its total expected claims, typically 120% to 125%. With this insurance, if an employer expects total annual claims of $10 million and insures up to 120%, the stop-loss carrier would reimburse the employer for claims exceeding $12 million, usually up to $1 million annually.
There was a time when employers felt “claims in excess of $1 million were unusual and claims in excess of $2 million were rare. But, fueled in large part by the high cost of specialty drugs, the natural limit is changing,” according to a Mercer blog post, co-authored by Rich Fuerstenberg, senior partner and consultant in Mercer’s New York City office.
He says there are two types of catastrophic claims. With organ transplants, a serious accident or even cancer, claims may spike at the time of treatment, but usually later the cost drops to a level that is manageable by the employer. But, Mercer is now seeing claims that remain high. “Employers don’t see a regression back to the mean health care costs for employees, and that’s where traditional stop-loss begins to fail,” Fuerstenberg says.
According to the blog post, examples of the second type of catastrophic claims is the drug treatment protocols for conditions like hereditary angioedema and hemophilia, which are more maintenance-like than curative, and can be $10 million to $20 million regular claims.
Mike Tesoriero, vice president and health consultant of The Segal Group, in New York City, also says his firm used to see $1 million claims every so often, now it’s seeing multimillion-dollar claims more often.
He notes that in 2014, provisions of the ACA removed annual and lifetime limits. “Up until 2014 self-insured plan sponsors could create a maximum of benefits paid—amounts beyond that were the participant’s responsibility—but that is no longer allowed,” Tesoriero explains. This makes catastrophic claims a much bigger risk for self-insured health plan sponsors; they can wipe out the plan sponsor’s reserves.
One problem with stop-loss insurance is if a participant has consistent high-cost claims, the insurance provider may put a laser on him. This means, if the plan sponsor has purchased stop-loss insurance with a $100,000 threshold per participant, but if the stop-loss insurer feels a participant will continue to have high-cost claims, it can force a higher threshold for that employee, meaning the plan sponsor will be responsible for more of the claims cost. Or, according to Fuerstenberg, the stop-loss insurer will say it is not covering that participant anymore.
“We need to see more evolution in longer-tail stop-loss claims,” he says.
“All forms of insurance are based on unknown risks,” Tesoriero says. “The plan sponsor has to provide participants’ current diagnosis and prognosis so the insurer can review those. It will either add to its cost the cost of the expected major expense or laser them. Our work is try to mitigate those lasers.”
According to the Mercer blog post, “Many insurers and reinsurers have become less willing to offer rate caps and ‘no new laser’ contracts.”
Is a captive a solution?
The blog post also says, “For employers seeking stop-loss deductibles of $1 million or more, utilizing a captive can help by accessing reinsurance markets.”
Fuerstenberg explains that a captive is when an employer sets up its own insurance company. He says most large insurers have captives. Captives have one policy holder—the employer—so it doesn’t need a broad structure like other insurance companies. There’s no need to set up claims processing or a call center. The captive will make claims payments and will get reimbursement from a reinsurer.
According to Fuerstenberg, a self-funded health plan sponsor can buy stop-loss insurance from a captive in the same way it does in the broader insurance marketplace. A captive may take a layer of risk between $250,000 or $1 million and buy reinsurance for costs above $1 million. “It’s an added layer of risk,” Fuerstenberg says.
He explains that one of the benefits of a captive is it may have excess capital; the company may be able to absorb more volatility with a captive than on its general ledger. Another benefit is the captive can access the reinsurance market that other insurers can’t. However, a reinsurer will also laser out high-cost recurring claims, so there are limitations.
Mercer’s Catastrophic Claim Captive Solution can help large employers address the challenges in the traditional stop-loss market. Additionally, Fuerstenberg says, establishing a captive is not very expensive for smaller employers. He says he has seen some group captives—employers rent access to a captive along with other similarly situated employers. Together, they pay and pool risk. Fuerstenberg says smaller employers may be wary of going to a fully self-insured arrangement, so they join a group captive where each is responsible for its own claims, then there’s a layer of, for example, between 50 or 200 pooled claims, and over that, they use a reinsurer.
“It’s a nice option for employers that want to transition to self-insured, but some go the group captive route and then stay there,” he says.
What self-insured health plan sponsors should consider
Self-insured health plan sponsors need to know their choices of premium and protection limits to decide what is best, says Tesoriero. For those with stop-loss insurance, at renewal, they should not only revisit the rates but also should be reviewing underlying terms. If they can find a policy with no new laser combined with a rate cap, it gives more protection.
Plan sponsors should consider whether they are risk averse or risk tolerant, Tesoriero adds. He has a multiemployer plan client with a large amount of reserves which uses that to cushion against large claims. Another client has two stop-loss insurance policies, each for different groups, with separate policies and threshold levels. He says this is unique, but an option.
“For larger employers who have traditionally not purchased stop-loss insurance in the past, they need to reevaluate their risk because of the changing nature of large claims,” says Fuerstenberg. “Some say they can absorb $1 million or $2 million, but they can’t absorb $10 million over years. We tell them we’ve seen it, and they need to think about it.”
For small employers—500 employees or fewer—if they get one of those large claims, they may not be able to self-insure anymore, they may need to go to fully insured, he adds.
“Health care benefit plan sponsors need to rethink how to manage that specific type of risk, especially as medical and pharma innovations continue,” Fuerstenberg says. “Each plan sponsor’s risk will lead to a different response. They are just a new hire or new diagnosis away from being struck by lightning.”
Tesoriero says self-funding is still a good idea for the tax and premium savings. It is also good because plan sponsors are able to look at medical and pharmacy data to see what’s causing large claims. “Employers can get that kind of granular data when they are self-funded, and it helps to customize good solutions. When fully-insured, employers don’t get that type of data and carriers will build into their price the cost to cover conditions that may cause large claims,” he says.“Getting to the root cause of why claims occur helps with plan management and decisions to implement wellness programs or other solutions to mitigate chronic conditions,” Tesoriero concludes.