Group & Benefits Planning

The Role of Stop Loss in the Group Market

A risk management answer for self-funded companies

by Chris Quinn

Mr. Quinn is vice president of Unum Stop Loss distribution. Contact him at (207) 575-2858 or [email protected]

It’s no surprise that medical insurance is one of the biggest expenses for employers. In 2016, the average employer paid nearly $13,000 to insure one employee’s family, according to a recent Employer Health Benefits survey by Kaiser Family Foundation1. Health care rate hikes are not expected to slow down, either. A Marketplace Realities report by Willis Towers Watson predicts that rate increases for fully insured plans range from 7-8 percent over the next year2.

Employers are using a variety of solutions to mitigate costs while not compromising coverage, like implementing high-deductible health plans, offering voluntary benefits, and developing cost-sharing tactics between employers and employees. These are solid solutions, especially as more gaps in coverage emerge in traditional health care plans.

Another option more companies are considering is self-insurance. Traditionally, for large and mid-size companies with sizeable cash flow, self-insurance allows companies to design and fund their own employee benefits plans, eliminating the need for a fully funded insurance plan.

How it works

Self-insured plans differ from fully funded insurance plans in several ways. With fully funded plans purchased from health insurance providers, employers pay monthly premiums to the insurer. The insurer administers the plan, and premiums are priced to cover expected claims, administrative costs, profit and risk. If claims are lower than expected, the insurer keeps the difference. If claims are higher than expected, the insurer is responsible for the difference.

For self-insured plans, also called self-funded plans, the employer sets aside and invests funds to pay claims directly. The employer determines the funding levels to cover expected claims and manage risk. Employers typically contract with a third-party administrator to help with administrative processes, like negotiating with providers, processing claims, enrolling in benefits, and more. The appeal of this approach is that if claims are lower than expected, the employer keeps the difference. However, if claims are higher than expected, the employer is responsible for the difference.

Self-funding provides a number of advantages for employers, like improved cash flow, potential monetary savings if claims are lower than expected, and greater flexibility in designing benefits plans that work for their employees’ unique needs.

But self-funded plans also create risk. Employers that self-fund are vulnerable to medical claims exceeding expectations.

The key to making self-insurance an optimal solution is using stop-loss coverage as a backstop.

Stop Loss: The risk management answer for self-funded employers

Stop loss coverage helps self-funded employers manage risk by capping expenses from employee medical claims, limiting a company’s exposure to financial losses. Catastrophic health events, like premature babies or cancer, are possibilities in any workforce and are likely to quickly exceed medical expense estimates. As a measure of how great this risk can be, a single premature infant can incur an average of $54,194 in medical bills3.

Self-funding provides a number of advantages for employers, like improved cash flow, potential monetary savings if claims are lower than expected, and greater flexibility in designing benefits plans that work for their employees’ unique needs

It’s worth mentioning that there are two kinds of stop loss coverage available for companies – specific stop loss and aggregate stop loss.

Specific stop loss insurance kicks in when a covered person has a catastrophic health event that results in expensive claims. Specific stop loss reimburses the employer for the difference when a covered person’s medical claims exceed the pre-determined cost estimate.

Aggregate stop loss coverage helps protect self-insured employers when the company’s total medical claims, in aggregate, are higher than expected. If paid claims exceed expected claims by a predetermined percentage, typically 25 percent, the employer would be reimbursed for the difference by the stop loss provider.

Another smart move

Another smart move to help a self-funded company save money on medical claims is to intentionally invest in the overall health and wellbeing of employees. A healthy workforce is more likely to spend less on medical expenses. Wellness programs, preventative services, telemedicine, health assessments and employee assistance programs can all contribute to creating and maintaining a healthy workforce.

The role of a broker

While self-insurance is not a solution for every company, an advisor can help determine if it’s a potential fit. By examining a company’s financial performance, industry trends, and cash flow, a broker can help determine a company’s risk tolerance. Also, employee demographics, trends in past claims and medical costs can all be used by brokers to make projections for future claims costs. If a self-funded benefits plan seems to be a fit, the broker will be instrumental in selecting an appropriate plan.

Brokers can also aid in designing an employer’s medical plan, filling in coverage needs and boosting employees’ financial protection with supplemental and voluntary benefits.

Since the administrative burden will be heavy on employers who choose to self-fund, brokers will also add value if they can recommend a strong third-party administrator to facilitate these needs for the employer. And brokers should always ensure their self-funding employers have adequate stop loss coverage for protection against potential losses.

Self-insurance is growing in popularity, and a recent Milliman study on employer stop-loss suggests it’s a trend that isn’t likely to slow down any time soon4. Be ready to determine self-insurance as a potential solution for your customers, especially as they navigate the on-again, off-again health care reform world and rising health care costs. ◊

 

 

 

Endnotes
1. Kaiser Family Foundation, “2016 Employer Health Benefits Survey” (2017).
2. Willis Towers Watson, “Marketplace Realities 2017: The search for growth” (2017).
3. March of Dimes, “Why Should You Care About Premature Birth?” (2017).
4. Milliman, “Whitepaper: 2017 Employer Stop-Loss Market” (2017).