Stop Loss 101

The basics of self-funded insurance

Objectives

• At the end of this presentation, you should be able to answer the following questions:– What is self-funding?

– What are its advantages?

– What are key considerations before self-funding?

– How does self-funding work (basic level)?

– What is Employer Stop Loss coverage?

What is self-funding?

• An alternative to traditional health insurance in which an employer pays its own claims

• Administrative functions are often delegated to a third-party administrator (TPA) or an insurer

• Stop loss insurance helps an employer manage its exposure to catastrophic claims

• Governed by ERISA (Employee Retirement Income Security Act, 1974)

– Exempts most self-funded plans from state regulation, including premium taxes and mandated benefits

The Risk Continuum

Fully-Insured Plans

Retrospective Premium

Agreements

Minimum Premium Accounts

Self-Funded ASO with Stop Loss Insurance

Pure Self-Funding

(ASO)

100% Risk Transfer No Risk Transfer

Advantages of Self-Funding

• Employer (or group) controls the plan—not the insurer

• Employer (or group) can take advantage of good medical/claims experience

• Can lead to more effective cost control

• Flexible health plan design

• Eliminates most state premium taxes (~2-3%)

Advantages of Self-Funding

• May help cash flow– Claims paid as incurred, eliminating pre-funding

or up-front reserve payments

– Employer holds reserves; receives interest benefit.

• Not subject to insurers’ risk charges and profit margins

• Can purchase stop loss insurance to increase predictability and reduce exposure to catastrophic claims

Key Considerations

• Level of risk tolerance

• Cash flow limitations

• Unpredictability/poor experience

• Exposure of assets– Comingling of assets (General Asset Plan)

– 501(c)(9) trust

• Fiduciary responsibility

• Risk suitability

How Stop Loss Fits

• Self-funding does not require stop loss

• Stop loss is simply the vehicle used to help a self-funded plan manage the risk

• Stop loss involves an insurance agreement between the employer/plan sponsor and the insurer– The employer/plan sponsor is the insured

– The individual/participant is NOT the insured

• The employer must fulfill its obligation to pay claims regardless of whether stop loss is in place

How Stop Loss Fits

Fully Insured

Employee

Employer

Self-Funded

Employee

Employer

Stop Loss

Forms of Stop Loss Coverage

• Traditional approach– Specific

• Mitigates risks on individuals

• Stop loss insurer reimburses employer for claims after individual’s deductible is met*

– Aggregate

• Mitigates risks on the group

• Stop loss insurer reimburses employer for claims after group’s deductible is met*

– Specific and aggregate work together

• Aggregate Only with level funding– Self-funded option for small employers

– Provides predictable cash flow

*Terms of reimbursements defined by plan document.

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Example: Specific Coverage

$175,000

$55,000

$237,500

$95,000

$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

$400,000

Claimant A Claimant B Claimant C Claimant D

Specific Deductible ($100,000)

Stop Loss Carrier’s Risk

Employer’s Risk

Specific Coverage: Deductible

Consideration for determining appropriate deductible

• Risk factor—i.e. the relationship between the specific amount and the expected paid claims

• 5-15% of expected paid claims

• Group size

• Employer risk tolerance

Specific Coverage: Rate Calculation

• Based on actuarial data and individual group characteristics (aka manual rate)– Geographic location

– Industry

– Demographic (age/gender)

– Deductible level

– Managed care network

• Manual rate is adjusted for:– Claim history

– Anticipated large claims

– Changes to the plan

Example: Aggregate Coverage

$0

$250,000

$500,000

$750,000

$1,000,000

$1,250,000

$1,500,000

$1,750,000

$2,000,000

$2,250,000

Group Claims

Stop Loss Carrier’s Risk

Employer’s Risk

$1,250,000 Attachment Point (125% of $1,000,000)

$1,000,000 Expected Claims{ MARGIN – 125%

Aggregate Coverage

• Offered at 125% of expected claims

• May include Rx, dental, vision

• Not sold alone– Does not provide catastrophic coverage

– Specific coverage protects the aggregate

Aggregate Coverage: Attachment Point

• Manual rating is combined (blended) with group’s claim experience– Depends on amount of credible experience

available

– Total is considered expected claims

• The underwriter adds a corridor, or margin– Limits the frequency and severity of expected

claims

– Industry standard is 25%

• Aggregate attachment point = expected claims + the corridor

By design, groups should not have aggregate claims, except in volatile years (large changes in payment patterns or utilization)

Aggregate Coverage: Attachment Point

How to calculate:

Paid claims for policy period

- Specific claim reimbursements

= Net paid claims

X Trend factor

X Plan adjustments

X Contract adjustment

X Corridor (usually 125%)

= Final experience composite

Aggregate attachment point blends experience and manual composite * number of employees.

Aggregate Coverage: Maximums

• Standard annual limit is $1,000,000

• This is independent of the specific stop loss maximum

• Maximum reimbursement = (expected claims * 25% corridor) + $1,000,000

Aggregate Only with Level Funding: How It Works

• A stop loss proposal is generated– There is no Specific deductible

– Includes premium and funding factors

• Employer remits fixed monthly payment– Includes stop loss and administration fees

– Based on number of employees

• Funding factors are deposited into benefit account and used to pay claims

• When claims exceed benefit account balance, reimbursement is issued

• Funding is reconciled to paid claims at year end– If funding > claims paid, plan retains the balance

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Sample Proposal

Example: annual claims less than funding

$-

$5,000

$10,000

$15,000

$20,000

$25,000

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Monthly funding: $ 20,000

Annual funding: $240,000Annual claims: $222,000Employer retains: $18,000

Example: annual claims exceed funding

$-

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

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Monthly funding: $ 20,000

Annual funding: $240,000Annual claims: $251,000Summit Re reimburses: $11,000

Advantages of Aggregate Only with Level Funding

• An option for small employers interested in transitioning to self funding

• Budget stability– Monthly cost per employee remains fixed

regardless of claim activity

• Immediate funding

• Rating based on your specific population

• Favorable claims experience is retained by the plan

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Stop Loss Definitions

• Fixed costs– Specific premium

– Aggregate premium

– Admin fees (TPA, PPO network, UR, etc.)

• Variable costs– Expected claims

• Total cost– Fixed + variable

• Maximum costs– Fixed

– Attachment point (expected claims + corridor)

Stop Loss Definitions

• Paid– Funds actually disbursed by the contract holder or

its agent

– The unconditional and direct payment of a claim to a covered person or his health care provider(s)

– Payment is deemed to be made on the date that both• The payor directly tenders payment by mailing or

otherwise delivering a draft or check, AND

• The account upon which the payment is drawn contains sufficient funds for the draft or check to be honored

• Incurred– The date on which medical care, service, or supply

is provided to a covered person for which a charge results

Contract Example: 12/15

Paid (date claim paid by administrator)

Incurred (date service was rendered)

1/1/17 3/31/1812/31/17

• Claims incurred in 12 months and paid in 15. Eligible claims must be incurred during the 12-month contract period and paid within the contract period or the three months immediately following.– Abbreviated version of true incurred contract.– Variations include 12/18 and 12/24.

Contract Example: 12/12 Contract

Paid (date claim paid by administrator)

Incurred (date service was rendered)

1/1/17 12/31/17

• Eligible claims must be incurred AND paid within the contract period. – For renewal years, the contract will convert to a paid contract and claims will

be eligible under the renewal contract regardless of date incurred, as long as they were incurred on/after the initial contract effective date.

• Appropriate first-year contract type for a group that is currently fully-insured or one that has a self-funded policy with a run-out provision.

Contract Example: Paid Contract

Paid (date claim paid by administrator)

Incurred (date service was rendered)

1/1/17 12/31/17

• On renewal, a 12/12 or 15/12 contract becomes a paid contract. – Claims will be eligible under the renewal contract regardless of the date

incurred, as long as they were incurred on/after the effective date of the original contract.

• Appropriate for renewals that were initially 12/12 or 15/12 contracts.

Contract Example: 15/12

Paid (date claim paid by administrator)

Incurred (date service was rendered)

10/1/16 12/31/171/1/17

• Called a run-in. Claims incurred up to 90 days before the effective date and paid during the first contract period will be eligible under the policy. – Reverts to a paid contract for renewal years.

• Appropriate for a group that is currently self-funded with no run-out provision, but is new to the carrier.

Carrier Selection: Key Considerations

• Financial strength

• Stop loss policy

• Claims efficiency

• Underwriting philosophy

• Product options

• Access to resources

• Competitive rates and terms

RFP Process

Initial Screening

• Review for complete submission

Rate Calculation

• Enter group demo, census data, and benefit plan info into rating system

• System calculates manual rate

• Information sent to underwriter

Underwriting

• Review case data

• Review claims experience, incl. large claim detail*

• Enter data into rating system to calculate rates and loss fund factors

• Prepare quote

Quote Follow-up

* May route to RN medical management team to review/estimate potential large claims

RFP Submission Requirements

• Employer data– Business name, location, and

number of employees at each

– Type of industry (SIC code)

– Current census (Excel preferred)

• Employer coverage history (last 3 years)– Current carrier or HMO

– Schedule of benefits

– Rate history

– Paid claims and enrollment

– Large claims info

• Requested coverage– Contract type

– Specific deductibles

– Aggregate margin

– Complete plan of benefits

– Managed care network (PPO)

– Proposed effective date

– Commission level

– Due date of quote

Key Stop Loss Terms

• ASO – Administrative Services Only. A term used by carriers and HMOs to designate their services to self-funded employers.

• Census – Collected detail of an employer’s member population, including number of covered lives, coverage status, sex, DOB, and other demographic information.

• Corridor – The margin or cushion an underwriter includes to limit the frequency and severity of aggregate claims.

• ERISA – Employee Retirement Income Security Act of 1974.

• Experience – Detail of actual claims paid during a specified time period for a particular employer group’s covered members.

Key Stop Loss Terms

• Fiduciary – Any party with discretionary authority or responsibility for the management or administration of a plan.

• Fixed cost – All firm dollar costs of a self-funded plan. Includes specific premium, aggregate premium, admin fees, etc. Also known as hard dollars.

• MCO – Managed Care Organization.

• Plan document – Document which details the terms and provisions of a plan’s coverage.

• Self-funding – Self-insurance.

• Soft dollars – Claim costs, which are variable though often capped. AKA claim liability or attachment point.

• TPA – Third Party Administrator.

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