Self-Insured Businesses Increasingly Turn to Stop Loss Coverage

June 15, 2015

As the Patient Protection and Affordable Care Act (ACA) employer mandate moves into 2015, employers are taking a long, hard look not just at what they spend up front but at actual costs — premiums, administration, fees, and utilization. For many employers, self-insurance — with the protection of stop loss coverage — has become a more attractive option.

However, the growth of self-insurance does have repercussions, including higher premiums for protection against unsupportable losses. In some states, lawmakers are even seeking to limit stop loss coverage. As a result, plan providers and payers are looking for ways to reduce risk for all stakeholders.

What is stop loss coverage?

In fully funded health insurance plans, the employer pays premiums and the carrier assumes all financial risk — and retains any and all profit.

With self-funded health insurance plans, employers save on the cost of premium, taxes, and risk margins, providing improved control over costs.  In exchange, the employer assumes all financial risk. To help minimize this risk — such as catastrophic medical claims (i.e., those claims that exceed a predetermined amount or deductible) or increases in utilization — self-insured employers purchase stop loss insurance (or reinsurance).

Stop loss insurance covers the employer, not employees. The employer pays all losses under the health insurance plan; then, the stop loss insurance plan reimburses the employer for the amount of the loss that exceeds the stop loss insurance plan deductible. Most stop loss insurance plans are established through a trust in which the policyholder (i.e., the employer) is a trustee. The employer must fund this trust or similar financial instrument — to cover any losses incurred through the health plan.

Self-insurance offers many benefits:

  • Lower costs through reduction of premiums — employers are not prepaying for coverage
  • Flexibility in complying with ACA requirements (for example, ACA limits on health insurance profits don’t apply to stop loss insurance and self-insurers do not have to justify rate increases or spend at least 80% of their premium dollars on healthcare services)
  • Plans can be customized based on the employee population and needs
  • Tax benefits — reduced state premium taxes
  • Flexibility to manage and control  health care expenditures
  • Control over contracts with providers and selection of cost containment services

Self-insured employers rely on stop loss insurance coverage to protect them from excessive losses that could irreparably damage their business. There are two primary coverages:

  • Individual Stop Loss (ISL) — this insurance protects against catastrophic claims incurred by covered employees.
  • Aggregate Stop Loss — Typically purchased in addition to an ISL policy, this coverage protects the employer from volatility when the total annual claims for all employees exceed expectations

A move to take control: More employers choosing self-insurance

In the U.S., employer-sponsored health insurance accounts for half of all insurance spending. However, the industry is seeing a significant shift to self-insured plans, in part because self-funded plans are more cost-effective and offer plan design flexibility, but also because large employers that were once bare of coverage are now looking toward self-funding to mitigate their risk as well. Also driving this shift is:

  • The ACA’s extended coverage to adult children of the insured
  • Elimination of annual and lifetime maximum amounts
  • Restriction of cost sharing for preventative care
  • Inclusion of coverage for new and costly medical devices, pharmaceuticals, and biologics

With the ACA now in full effect, the shift to self-funded health insurance has accelerated. In fact, in 2014, the rate at which employers contracted with health plans was either flat or dropped, whereas the creation of self-insurance programs grew.

Shifting the risk doesn’t make it go away

Of course, this trend has repercussions. The most evident result is higher premiums for stop loss coverage. According to Ken Jeffries in a US Healthnews Mercer post, premiums for stop loss insurance have increased 15% on average over the past three years.

What’s behind the increase?

  • Another driver of higher premiums is the increased interest in self-insurance among smaller employers. Attracted by the potential to mitigate ACA provisions required of fully insured plans, these small employers tend to accept less risk, resulting in requests for lower deductibles therefore, shifting costs more quickly to their re-insurers.
  • At the same time, the health insurance sector has experienced marked increases in catastrophic medical and specialty drug claims. As these claim risks grow in cost, stop loss carriers often absorb more risk

Many states are now attempting to regulate self-insurance more rigorously. This is based in concern that self-insured-companies will draw younger, healthier populations away from government funded exchanges . Regulators have taken steps to discourage certain groups from self-funding by mandating minimum individual deductibles and aggregate limits.

Califoia, Rhode Island, and Minnesota have proposed limiting self-insurance coverage by raising the dollar amounts that would trigger a stop loss claim (called attachment points). For example, in Califoia, the proposal would set the trigger amount at no less than $95,000, an amount that may dissuade small companies from exploring and/or purchasing stop loss solutions.

Self-insurance has a decades-long history as a viable alternative for organizations of all sizes. Regulators and employers will be watching closely to see whether self-funded and fully funded plans become allies or competitors in the health insurance landscape.

Containing the rising cost of stop loss coverage

To contain rising risk and associated costs, self-insurance plan sponsors must consider their financial risk in light of their risk tolerance. In addition, they should:

  • Conduct a data-based evaluation of both premiums and deductibles so that they can apply appropriate increases year to year;
  • manage ongoing claims with the help of a third-party analysis from a program such as PULSE + Plus™ or a specialty vendor; and engage an experienced stop loss partner — one that understands the healthcare market, conducts comprehensive audits, provides client support, and can support medical management

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