Services - Stop Loss, A Primer
An increased frequency of high claimants, including organ transplants and premature births places ever greater importance on medical stop loss to protect self-funded employers - however it remains one of the least understood, if not intimidating, aspects of a well-managed health plan.
Less an employee benefit than an employer benefit, medical stop loss protects self-funded medical plans from the financial volatility caused by catastrophic claimants. Sporadic by nature, these claimants are difficult to predict, but potentially devastating to health plan finances, as several diagnoses are now able to reach $1 million or more for a single claimant in a single plan year.
By transferring the volatility of these claimants through stop loss coverage, employers are able to more definitively budget their expenses, as well as support substantial funding requests for large claimants.
Types of Coverage
There are two forms of stop loss coverage:
Individual (or specific) to protect against catastrophic claims incurred by a single individual; and
Aggregate to protect against higher than anticipated overall claim activity.
Many employers consider individual coverage, but only those with typically less than 2,000 employees (or very risk adverse) consider aggregate. If so, reimbursement is provided once overall claims cross a targeted attachment point (e.g. 125% of expected claims). For this primer, our focus is on individual coverage.
Individual stop loss is based on a deductible beyond which the policyholder is reimbursed for further claimant expense. The deductible typically ranges from $100,000 to $500,000, based on group size and risk tolerance. As its name implies, stop loss limits a plan sponsor's exposure to the deductible.
Perhaps the most confusing element of coverage, contractual terms define the period which a claim must be both incurred and paid to qualify for reimbursement. This accommodates the familiar claim 'lag' from the date of service to time of claim payment. All stop loss contracts cover claims incurred and paid within their 12 month policy period, but vary whether any claim 'run-in' or 'run-out' is covered.
A common run-out period is three months, producing a contract which covers claims incurred in 12 months, but further paid in the same 12 plus an additional three, or a 12/15. Alternatively, a contract with a run-in period of three months will cover claims incurred in those prior months, but paid in the 12 month basis, or a 15/12.
Ensuring contract terms on replacement or renewal coverage fully integrate with an expiring contract is critical to avoid unintended coverage gaps.
Issues to Consider
Disclosure - A carrier will request disclosure of all known high claimants or high risk individuals before providing a 'firm' rate quote. No rate should be considered final until completion of this task.
Lasering - Upon rate quote or renewal, a carrier may place a higher deductible on certain individuals or even exclude them from coverage. Be sure to understand your carrier's philosophy on renewal lasering.
Leveraged trend - When plan deductibles remain unchanged at renewal, the full financial impact of leveraged trend on high claimants is borne by the coverage - producing a higher, leveraged rate increase. To offset, consider indexing your deductible to underlying medical trend.