Strictly speaking, stop loss reinsurance is used by most self-insured employers to reduce exposure to loss with their health benefits. The employer establishes a qualified plan document that becomes their group benefit plan. To this they attach a summary plan description that details the employee's coverage, coinsurance, deductibles and co-pays.

The employer then hires a competent plan administrator to manage the administration of the plan benefits. The administrator also might provide a medical network that offers a discount on medical costs when incurred and they usually arrange a benefit prescription manager to mitigate cost of prescriptions.

Stop loss is often provided by the TPA to limit the employer's exposure to loss or claim retention. There are two varieties of stop loss. One is the specific excess of loss and the other is an aggregate stop loss.

Under PPACA, the plan must provide unlimited coverage per year and lifetime for everyone insured. If an employee develops a serious chronic condition, the claim expense could run into the millions. This looming threat of catastrophic loss encourages employers to limit their loss by purchasing excess stop loss attaching at a certain loss threshold. This could be $40,000 per claim for a smaller employer and much higher for a larger employer.

Employers then want to limit losses caused through “death by a thousand cuts.” To do this, they buy aggregate stop loss, which attaches when total claims within the risk retained by the employer reach a certain amount or threshold. The reinsurer determines expected claims and leaves a corridor of increased retention with the employer for claims that may exceed the expected total. This is normally an additional 20 percent to 30 percent. The reason for this is to enable the reinsurer to receive an offset for commission and expenses before having to pay any claims. Aggregate stop loss rarely pays a claim unlike specific excess stop loss that does. The term for this protection is sleep insurance. It allows the employer to sleep at night knowing he does not have to be concerned with aggregate total losses within his retained limit from bankrupting the company.

So what could possibly go wrong? I mean the employer is paying his own claims and limiting his downside with stop loss.

The answer is plenty. Some of the problems include, but certainly are not limited to:

Self insurance, like group insurance, is a flawed approach that leaves the employer at risk of busting their budget and financially crippling their business. Insurance is all about risk pooling and the operation of law numbers. Year over year loss variations can, and will be, huge and there's little the employer can do about it.
Stop loss is medically underwritten, unlike individual or group policies. The reinsurer can laser an employee, which is a cute term for excluding them, a condition they might develop or increase the employer's retained loss liability before they'll respond.
Stop loss reinsurers are often relatively small carriers. They don't have a million lives insured so their loss experience is subject to the same vagaries and variation the normal employer faces when they self insure. If it is a Lloyds' syndicate, you're on your own at claim time if they don't respond. Non-admitted reinsurers aren't subject to state control. Lloyds once had the hallmark tradition of never failing to pay a claim. That ended roughly three decades ago. The English refer to insurance as “schemes” so be very, very afraid when considering a Lloyds policy. Similar concerns should apply for an unlicensed and non-admitted reinsurance company.
Aggregate stop loss is basically useless. It is almost illusory protection. That is why the premium is so low. It is easier to hit the moon with a nickel than to have an aggregate stop loss trigger on a self insured plan. If it is triggered the employer may discover that it only stops loss for an amount of coverage. An Ebola outbreak might trigger it or pandemic flu but the aggregate has a policy limit and if that were to be used up the employer then reassumes any remaining loss. Time for some sleepless night there employer. If not illusory certainly a mirage.
The excess stop loss may decline to cover a claim. Their coverage is conditional and limited and the policy form is less broad than the minimum essential benefits of PPACA. The carrier does not have to provide PPACA level of benefits. They may also be an indemnity agreement which means they reimburse only after the employer pays. Hey bro can you spare me a million or so for that kidney transplant?
Employers are not told nor properly informed about 12 12 coverage verses 12 15. The later should be mandated. If the reinsurer has a 12 12 policy their coverage ends at expiration. Under a 12 15 policy they provide run off coverage for another 90 days. The 12 12 is equivalent to a liability claims paid policy agreement essentially. The 12 15 is a claims made agreement with a 90 day tail or extended reporting provision included. Many states outlaw claims paid policies in the casualty market as being opposed to public policy. Regrettably no such prohibition applies here. So be sure and buy the 12 15 policy. Pay the additional premium.
What are the provisions for the reinsurer to cancel during a policy year? Pays to have a complete understanding of that before purchasing the agreement. When will they be required to give notice of non renewal? Ask for at least 120 days before buying the policy.
If you switch carriers at renewal, who covers what and for how long? You need to know this before purchasing that first policy.
Stop loss policy forms and coverage change year to year. You have to read the entire agreement each year or you might have an unwelcomed surprise at claim time. Some enterprising reinsurers keep the same form numbers but still change the wording within the form or endorsement.
Determine if the carrier has an AM Best rating and size classification. All failed insurers have one thing in common and that is they probably had an A rating by Best at one time so that does not mean the carrier has a good housekeeping seal of approval. Dig down and determine how long they have been in the market and what is their financial size. Smaller the more problematic and if new to the market, small and offering cheap rates be smart and say no thanks.
Don't change reinsurers over a small premium savings. Your plan is a $1 million investment in terms of plan costs and liabilities. A savings of $20,000 to switch carriers is normally not prudent.
When an employee is excluded or a condition is not covered or even the retention on that sicko is increased the employer will need to have funds available for this almost certain increased loss. The employer has very little protection when this happens and it will happen.

These are some of the problems of using stop loss as a part of a self insurance program. Self insurance makes sense but to make it work the employer must understand that this traditional approach may kick the cost can down the road a year or two but sooner or later the cost deferred will arrive with interest.

Instant Insights /

Self-Funding: Stop Loss? Not Exactly

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