Employer-sponsored health care is one of the most costly and complicated issues facing businesses today. Rising costs and ongoing regulatory changes have led many employers to take a closer look at their medical coverage options, hoping to squeeze out any new efficiencies they can. Given this environment, it is no surprise that many employers are asserting more control over their health care expenses by self-funding their insurance plans.
The benefits of self-funding are many, including lower health care expenses based on actual claims experience, control and customization of plans, no prepayment of coverage, and simplified state regulations and taxes. However, self-funded employers also assume the financial risk of their employees’ medical coverage and are responsible for paying claims as they are incurred. This additional risk can be daunting, especially for employers with smaller financial reserves and less cash flow. That’s why medical stop loss insurance — which reimburses employers when medical claims exceed a specific dollar amount — is a key component to most self-funded medical plans.
As more companies look to self-funding as a potential solution to the high cost and complexity of medical coverage, getting the most from a stop loss policy is equally important.
What matters to carriers
Like all insurers, stop loss carriers do extensive underwriting to accurately price the risk they are assuming. When shopping for stop loss insurance on behalf of your clients, it’s important to know what carriers look for when pricing and evaluating risk. Some of the key factors include:
1. Managed care networks. The use of strong managed care networks has a major impact on specific stop loss rates. Preferred pricing generally is afforded to networks the carrier feels have contracted the best discounts with health care providers. Through their hospital networks and quality care standards, managed care networks also help deliver better health care results — and thus less risk — than care managed independently.
2. Good claims data. An employer’s claims history forms the basis of stop loss pricing. Good recordkeeping, including both recent claims data and historical data for the previous one or two years, helps carriers better understand the actual risk being insured. This contributes to pricing that is fair and accurate. Brokers also can use this data — which good administrators should be able to provide — to help even smaller companies determine if self-funding is an option.
3. Broker control. Carriers appreciate brokers who understand and have earned the respect and confidence of their clients. Brokers should be more than middlemen. They should be experts who understand stop loss contracts and have the ear of their clients and knowledge of their business. They also should be able to explain a fair rate increase and advise their clients on the best course of action. Brokers with a large block of business and a history of long-term relationships generally will deliver a better experience for their clients.
4. Persistency. Like most businesses, stop loss carriers often reward companies that show a willingness to stick around. They have little incentive to provide competitive pricing to employers that change carriers year after year. Long-term relationships with clients also help carriers accurately price risk based on actual experience, rather than estimation.
These factors all play a role in the pricing of medical stop loss coverage. When they come together, stop loss carriers have a clearer picture of the risk they are assuming and will be able to price the coverage appropriately, which allows the carrier to offer more consistent pricing and underwriting upon renewal.
What matters to clients
As more employers explore self-funding as an option for their medical insurance, it also is important to understand what you and your clients should look for in a stop loss carrier. Here are some key considerations:
1. What is the carrier’s claim payment record? Find out what percentage of claims are reimbursed by the carrier, and what is the average turnaround time for paying claims. Employers need to feel they are getting what they paid for, and a large number of denials or frequent reimbursement delays may lead to dissatisfaction with the carrier.
2. Who actually holds the risk? Many stop loss carriers carry their own reinsurance. Find out how many parties are involved and at what dollar level the reinsurance is structured. Direct writers usually go without reinsurance or retain the majority of the risk themselves, and therefore can present a seamless approach to paying claims without the delay of third-party involvement. This differs from other arrangements in the marketplace where the carrier or managing general underwriter (MGU) holds little or no risk, is heavily reinsured and needs “permission” to pay claims over a predetermined dollar threshold. Getting approval from a reinsurer to pay a claim could lead to dissatisfaction with the carrier when payments are not timely or are denied altogether.
3. Are there conflicts? Evaluate the definitions and exclusions sections of the stop loss contract to ensure there are no conflicts between the stop loss policy and the employer’s plan document that could lead to gaps in coverage or obstacles to reimbursement.
4. What are the renewal policies? Stop loss carriers have different policies about “lasering” — excluding individuals from coverage or increasing rates to offset ongoing claimant liability — upon renewal. Lasering shifts additional risk back to the client. Employers also may feel they were lured in with low initial rates, only to see individuals lasered from coverage and/or significant premium hikes when they renew. Be sure to understand a carrier’s lasering policy before signing a contract to ensure consistency in their underwriting and pricing.
While simple in concept, self-funding of medical insurance and corresponding stop loss coverage can, in reality, be quite complicated. With good understanding of both the carrier’s and client’s needs, you can help ensure that clients achieve the full benefits and cost savings of self-funding, and their employees receive high-quality medical care.
Manning is vice president of Underwriting, Benefits Division, for Symetra Life Insurance Company.
