By Cyril Tuohy
Financial and benefits advisors in the midst of the fall renewal reason for self-funded health plans beginning Jan. 1, 2014, take note: Stop-loss insurance has entered a new era courtesy of the Affordable Care Act.
Unlimited lifetime maximum payments for underlying medical plans mean higher-severity claims, and employer health insurance mandates mean the expansion of covered lives. As a result, the nation’s 35 or so stop-loss carriers are taking a much closer look at claims histories for self-funded insurance plans.
Premiums may go up. Some companies may also place new restrictions on coverage. Ryan Siemers, a stop-loss insurance expert and principal at Aegis Risk in Alexandria, Va., said that self-funded companies will have to look more carefully at their combination of coverage.
“If you’re going to self-fund, be sure stop loss is going to adequately cover your underlying health plan,” Siemers said.
Many companies self-fund their employee health insurance because it is cheaper than paying for similar coverage in the traditional “fully-insured” market.
With self-funding comes more risk, particularly in an unlimited lifetime maximum world. This is largely because neonatal, congenital or genetic conditions, along with specialty pharmacy costs, are occurring more frequently and forcing consumers to burn through stop-loss deductibles.
Those big claims, stemming from rare but treatable diagnoses, amount to “reverse lottery” picks because stop-loss insurance carriers are facing potential payouts over not just one, but potentially multiple plan years for certain conditions, Siemers said.
“We think that folks are not always aware of the magnitude of the highest claimants, in other words the severity of some of the claims,” Siemers said, in an interview with InsuranceNewsNet. Without lifetime maximums, there’s no traditional limit to spending.
Cancer therapies, which use a regimen of specialty pharmacy drugs that can cost more than $300,000 a year, are part of a trend, he said. Specialty drugs are becoming a bigger part of the overall pharmacy spending trend, he also said.
“These will be life-supporting and so you can have a 40-year-old employee active in the company and in the health plan, and they are theoretically on the regimen for the rest of their lives,” Siemers said.
“When the CFO is informed of this and he says, “This is forever?” he’s looking at an unfunded liability of $2.5 million over the next five years alone for that one employee — assuming an annual cost of $500,000 or more,” Siemers said.
Stop-loss insurance reimburses a company, not the employee, for the claim. Assuming a $200,000 deductible, a stop-loss policy would reimburse an employer $600,000 annually for treatment that costs $800,000 a year, for example.
Stop-loss coverage was designed to cover the “pop-up” claim, the claim that occasionally incurs a couple hundred thousand or more on the underlying health plan, Siemers said.
“Pop-ups” for which stop-loss was designed to cover are a newborn with complications that require a lengthy hospital stay, or a successful kidney transplant for which a patient no longer requires dialysis.
“They are expensive, sure, but they don’t reoccur and there’s typically no ‘lifetime’ issue in play,” Siemers said.
That’s not the case for hemophilia Factor VIII, a genetic clotting deficiency that can run as high as $2 million a year in treatment. Nor does is it so for hypoplastic left heart syndrome (HLHS), in which the underdeveloped left ventricle affects flood flow. HLHS can cost as much as $3 million in the first two or three years of life alone.
It is also not the case for a $300,000-a-year cutting-edge oncology treatment, which can last for many years.
“Stop-loss is not designed to be underwriting for that kind of dynamic, and so in many ways these are becoming more and more like a disability claim, and stop-loss pricing needs to further consider these long-term claim dynamics” Siemers said.
With 97 percent of stop-loss contracts containing an unlimited lifetime maximum, according to the 2013 Aegis Risk Medical Stop Loss Premium Survey, stop-loss carriers are free to price to a level where that coverage is fully included in the rates, or may “laser out” the claimant.
“Lasering out the claimants at renewal is still common among many stop loss carriers, and coverage for these claimants may not continue into future plan years,” he said. “Even with ‘laser free’ coverage, the full cost of such a predictable claimant may be fully included in the renewal premium.”
Stop-loss carriers, like all insurance companies, need to know how much to set aside in reserve to pay claims. Prior to the era of unlimited lifetime maximums, stop-loss carriers relied on steady, predictable claims histories from employers and their health plans.
But with unlimited lifetime contracts and more employees joining employer health roles, the stop-loss equation is changing.
When a company self-funds its medical plan, employee contributions are set aside to pay for ongoing expenses, in addition to the previously budgeted employer contribution. The nation’s largest companies, often in excess of 20,000 or more employees, have enough employees to spread the risk of catastrophic claimants.
It’s the companies with up to 1,000 that are showing the most interest in self-funding. These employers don’t want to pay fully insured premium for their health coverage now that employer mandates may add hundreds of new employees to cover, Siemers said.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].
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