As brokers and consultants have been developing strategies for their small- and medium-sized employers to prepare for the full implementation of the Patient Protection and Affordable Care Act in 2014, there's been a growing interest in moving these clients to self-funded health plans. While there has always been advantages to self-funding, PPACA has added to the attraction of self-funding through opportunities for greater cost efficiencies and benefit plan design flexibility.

While self-funding is an increasingly attractive option for small and medium, it's almost always only a viable option if accompanied by the purchase of appropriate stop-loss coverage. Under a self-funded health plan, the employer is taking full financial responsibility for funding that health plan, with unlimited liability for large claims beginning in 2014. Most small and medium employers cannot reasonably assume such risk without specific stop-loss to protect against individual catastrophic claims and aggregate stop-loss to protect against an unexpected amount of total claims in the year.

It might be tempting simply to send out requests for quotes to a number of stop-loss insurance carriers, line the quotes up on a spreadsheet and choose the lowest price. The process might even move beyond the pure commodity approach to evaluation and consider other factors such as experience of the stop-loss carrier, reputation for customer service and claims paying, cost containment support and financial strength.

But stop-loss insurance is a unique product that requires greater care in choosing the appropriate product and carrier. Careful consideration needs to be given to policy features designed to better protect the financial health of small and medium-sized employers and their benefit plans.

Contract periods

The stop-loss contract provides financial protection to the employer sponsor of the self-funded health plan and has great flexibility to respond to plan costs based on dates of service (incurred dates) and when medical claims are actually paid (paid dates). The stop-loss policy is often referred to as being on an XX/YY contract, where XX refers to the number of covered incurred months and YY the number of covered paid months.

For employers moving from fully insured to self-funding, the stop-loss policy typically covers incurred dates during the 12 months of the plan year as the fully insured carrier is responsible for claims incurred prior to this. Very often, these stop-loss policies are quoted on a basis that also only covers claims paid during those same 12 months, often called a 12/12 contract. This contract certainly produces an attractively low first-year cost. 

The downside is that the employer is potentially exposed to a renewal rate shock as the stop-loss contract is renewed on a full paid (24/12) basis. More importantly, the employer is potentially exposed to unprotected liability.

For example, an employer may have incurred a plan liability for a hospitalization occurring toward the end of a plan year.

However, the claims resulting from that hospitalization may not be paid for weeks, or perhaps months. If the stop-loss policy was purchased on a 12/12 basis, that claim may not be covered if it's paid after the 12-month paid period under the contract. To better protect against that exposure, consideration should be given to a contract basis providing three months (12/15 contract) or six months (12/18 contract) run-out protection.

Terminal liability option

TLO provides an alternative to purchasing a policy with an extended payment period (however, it doesn't address the potentially high increase at first renewal). This option provides that the payment period under the stop-loss contract may be extended for an additional period, typically three months, following termination of the stop-loss contract. This option must be elected at the beginning of the policy period and may be used for both specific and aggregate coverage.

Advance funding

Stop-loss policies are designed to be reimbursement policies and as such, require the plan to pay, and the employer to fund, claims before the stop-loss carrier pays. This requirement may be financially impossible for SMEs faced with a catastrophic claim involving hundreds of thousands of dollars or more. A stop-loss policy with an advance-funding feature overcomes this problem. The stop-loss carrier will advance that portion of an eligible claim that would be reimbursable under the stop-loss policy.

Monthly aggregate accommodation

Stop-loss aggregate coverage operates on a plan-year basis. If total claims at the end of the plan year exceed the aggregate deductible, the stop-loss carrier reimburses those excess claims.

However, there's no protection for volatility from month to month. small and medium-sized employers concerned about monthly cash flow might consider the option of monthly aggregate accommodation. For policies with this feature, at the end of each month, if cumulative claims exceed the cumulative aggregate deductible, the stop-loss policy will advance the difference. This feature gives greater cash flow protection to those employers.

Elimination of lasers

One of the primary concerns regarding stop-loss for small and medium-sized employers is the annual nature of the contract. Each account is re-underwritten at renewal and groups with poor experience might receive very high renewal increases. 

Also, a group with an ongoing catastrophic claim may be subject to a higher specific deductible for that claimant (a laser).  Either of these scenarios can lead to significant financial exposure to small and medium-sized employers seeking to renew its stop-loss coverage. To avoid this risk, that employer should determine if its stop-loss carrier provides an EOL option. For a modest risk charge, the carrier will agree not to impose any new lasers at renewal and will limit renewal increases to a stated amount.

While price is certainly an important consideration, it's important for brokers to advise their small and medium-sized clients of stop-loss policy features and options that will better serve to protect the financial viability of their self-funded plan. With the right policy features, most SME clients can become comfortable with the liability associated with self-funding their employee benefit plan and have all the advantages that this financial model provides.