By Cyril Tuohy
A new report published by the ratings agency A.M. Best finds that rising demand for stop-loss insurance will come from small and midsize employers as self-insured insurance plans are not subject to certain requirements of the Affordable Care Act (ACA).
The ACA exempts self-insured plans from a health insurance industry fee and excludes stop-loss plans from minimum loss ratio requirements. This creates “an incentive-laden path for employers looking to avoid complying with the law’s consumer protections,” the report said.
Analysts Tom Zitelli and Jason Hopper, co-authors of the report, estimated that the fee assessed on health insurers is expected to generate $8 billion in 2014 and grow to $14 billion by 2018. The fee has been passed along to employers in the form of rate increases.
“Although self-insuring poses a greater financial risk for employers, even small businesses that have not traditionally offered self-insured plans are now considering this approach, especially if their employees are healthy and relatively low-cost to insure,” the authors wrote in their Trend Review report.
In the self-insured world employers assume the risk of paying for employees’ health care costs, usually through a trust fund. Expenses are paid out of the company’s cash flow as bills arise.
Since employers are on the hook for every claim, many buy a stop–loss policy to cover a catastrophic claim. Such a claim could have a big financial impact on the company’s bottom line, or even topple the company into bankruptcy.
In a traditional insurance plan, employers transfer the risk by paying a fixed premium to an insurer to cover benefits in excess of the deductible and copayments.
According to the Self-Insurance Institute of America, the self-insurance industry’s main trade group, self-funding has advantages over the traditional insurance model.
Among the advantages are that employers can customize their plans to their employee population, employers maintain control over interest-bearing health plan reserves, self-funded plans follow federal Employee Retirement Income Security Act regulation instead of state health rules and employers avoid paying state health insurance premium taxes.
Large employers have more readily adopted self-funding options than smaller employers because the risk of a huge claim is spread among a larger employee population, softening the impact of a massive claim.
Employees may not know or even care if their employer is self-funded or not, but the fact is that more employees are covered under self-funded plans every year.
U.S. Department of Health and Human Services data show that in 2012, 59.9 percent of private-sector health plan enrollees were covered through self-insured plans, an increase of 20 percentage points from 40.9 percent in 1998.
A.M. Best said most employers continue to self-fund claim amounts up to $2 million, with stop-loss protection for claims of higher amounts.
Based on the research of 33 stop-loss insurers, A.M. Best said it expects stop-loss insurance to remain “a very competitive line of business.” Prices, therefore, will be attractive for smaller businesses considering self-insurance.
Smaller employers have higher claims volatility as they have fewer employees across which to spread a medical risk. As a result, stop-loss carriers are creating special trusts to aggregate employers into a larger pool to dampen the spikes in costs, the report said.
Accurate pricing and stable underwriting results are a priority for stop-loss insurers if they are going to cover smaller companies, according to Zitelli and Hopper.
As the small group market shows more interest in stop-loss coverage, state regulators are mulling tighter requirements. Last year, bills passed the California and Colorado legislatures, the report said.
Not only are ACA exemptions making it more attractive for small businesses to consider a self-funding arrangement, but the severity of individual health claims surpassing the $1 million mark have increased tenfold over the past four years.
Sun Life, one of the largest writers of stop-loss coverage in the U.S., said a study of its claims data found that the increases were due to new medical technologies and advanced drug therapies.
Malignant forms of cancer were the top catastrophic medical condition from 2010 to 2013 with a value of paid stop-loss claims of $347.9 million, or 17.5 percent of all paid stop-loss payments that Sun Life made to policyholders over the four-year period, Sun Life said.
Chronic and end-stage renal diseases were next with a value of paid stop-loss claims reaching $164.3 million, or 8.2 percent of all paid stop-loss claims over the past four-year period.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at email@example.com.
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