Stop-loss insurers help small to medium-sized companies self-fund their benefits
A generation ago, large corporations realized that they could reduce their health benefits costs by paying their own medical claims—usually with the help of a third-party administrator or administrative services provided by experienced health insurers. Self-funding became one of the most common cost containment tools for companies with good cash flow and a consistent claims history.
Stop-loss insurance, coverage for claims that were excess of a set level of loss, protected employers from catastrophic losses, allowing them to make long-term estimates of their benefits costs. Small employers with fewer than 300 employees, however, were deemed too volatile for strict stop-loss underwriters.
Now, aided by access to less expensive and more flexible stop-loss insurers, smaller companies—as small as 50 employees—are using self-funded plan designs to control their own health benefits costs as do their bigger competitors. And stop-loss providers have dived deeply into the business with an engaging underwriting philosophy, innovative products and focused, use of some classic self-insurance tools, such as group captive insurance companies.
“Faced with the challenges of the current healthcare market, we are seeing more and more vendors and TPAs participating in networks that use reference-based pricing to help control the cost of the charges made by hospitals and facilities for their services.”
President and Chief Operating Officer
HM Insurance Group
The Guardian Life Insurance Company of America entered the stop-loss business about five years ago, driven by dramatic growth of interest in self-funded benefit plan and the implementation of the Affordable Care Act, which imposed new regulatory requirements on small to medium-sized employers.
As a result, these employers began looking to self-insure to maintain control of their employee benefits plans costs and respond to rising rates, says Robert Melillo, second vice president and head of stop loss. “We are pretty passionate about the stop-loss business, and we are seeing significant interest from employers with fewer than 200 employees and growing execution among even smaller employers.”
Traditionally, self-funding had been limited to large employers because of a lack of access to key information about smaller companies, including claims data and provider pricing, and also because of insufficient expertise among agents, brokers and consultants.
Stop-loss underwriters had difficulty obtaining claims history from health insurance carriers that sold fully insured benefit plans and lacked the information to successfully underwrite smaller risks, Melillo explains. Most agents and brokers lacked the analytical expertise needed to calculate long-term funding plans.
In response to client needs, agents and brokers started to build expertise and become more consultative. And stop-loss insurers such as Guardian have developed hybrid products designed especially for smaller companies. For example, level funding plans, Melillo notes, allow small companies to maintain steady month-by-month costs with premiums that build to a target pool of claims resources, with any bumps in claims covered by stop-loss insurance.
Small to medium-sized employers historically have been difficult to underwrite, agrees Mike Kemp, managing director and head of accident and health, North America, for Swiss Re Corporate Solutions.
“These employers typically have limited or no data on the claims experience under their fully insured medical plans. Such information is a key element to establish pricing and terms for the stop-loss risk associated with a particular employer,” Kemp says.
“Key underwriting criteria that Swiss Re Corporate Solutions considers include the employer’s willingness to manage the cost of its medical plan as it would any other cost element of running its business,” Kemp explains. “This is exhibited by the employer agreeing to adopt best-in-class approaches to claims administration, provider networks and cost containment initiatives, such as population health, wellness and disease management.
“To overcome the lack of historical claims data, we employ health questionnaires for groups under 51 lives. For larger employers, we use fully insured premium levels and recent renewal actions to assist in establishing proper pricing levels.”
“We are pretty passionate about the stop-loss business, and we are seeing significant interest from employers with fewer than 200 employees and growing execution among even smaller employers.”
—Robert Melillo Second Vice President and Head of Stop Loss
Guardian Life Insurance Group of America
Swiss Re Corporate Solutions has two packaged plans for employers with under 100 employees. For smaller employers (under 51 lives), the company suggests a level-funded product that provides a streamlined and simplified approach, protected by specific and aggregate stop loss.
“For groups with over 50 employees, the company offers access to group captive insurers,” Kemp says. The approach allows more flexibility in benefits design, funding and selection of vendors than does the level-funded program. The captive provides claims funding, and the employer chooses third-party administrators and other service providers.
“In many respects, this package looks very similar to a traditional stand-alone self-funded medical plan protected by specific and aggregate stop loss,” Kemp says. “What makes this program unique is the sharing of stop-loss risk among the employer members through their participation in the group captive reinsurer.
“We believe this arrangement gives smaller employers the best of both worlds—the potential savings associated with self-funding and the ability to mitigate some of the risks of traditional self-funding by pooling risk with other like-minded employers under the captive arrangement.”
Sun Life Financial U.S. also provides a range of self-funding approaches, including traditional self-funding, level-funded plans and group captives, says Brad Nieland, vice president of stop loss.
“We have experience working with a wide range of employers, as small as 50 employees—and in a few cases as small as 35 lives. However, we generally focus on employers with 50 to 500 employees where we can provide the maximum in-plan design flexibility and transparency, cost savings and tax breaks, and the most control of health benefits,” he says.
Nieland says self-funding and particularly group captives are a tremendous growth opportunity for this target audience. He says SunLife market research indicates that about 40% of employers who are currently fully insured are considering moving to a self-funded approach, and about 70% of those are considering a group captive plan. About 80% of agents and brokers say they expect at least one of their clients will use a group captive in the future.
In October, Sun Life partnered with Pareto Captive Services to provide group captive solutions for small employers that would reduce claims volatility for already self-funded firms or fully insured employers that are making a transition to self-funding. The partnership’s new stop-loss captive, Legend Re, will become available in January 2018.
“Captives allow employers to pool together to share a portion of their self-funded risk, reducing claims volatility and making them a viable option for small to medium-sized employers looking to self-fund their medical benefits,” Nieland says.
The transition from fully insured plans is particularly challenging for this class of employer, and the availability of a captive to provide reinsurance during a transition smooths out the volatility of the transition and eventually serves as a source of stop-loss insurance for the final self-funding option.
Tom Doran, president and chief operating officer of HM Insurance Group, notes that stop-loss pricing and plan design continue to evolve as new tools and pricing models come to the forefront. The company tries to combine conservative underwriting with innovative claims administration, he explains.
“Our approach is to write policies that ensure we can pay claims quickly, knowing that smart business decisions help protect our clients from the financial risks of catastrophic claims as well as safeguarding our ability to pay those claims,” he says. “We also use streamlined processes for ease of claims submission and work with our third-party administrator partners to implement cost containment practices to help manage rising claims costs.”
Among those cost containment strategies is reference-based pricing. “Faced with the challenges of the current healthcare market, we are seeing more and more vendors and TPAs participating in networks that use reference-based pricing to help control the cost of the charges made by hospitals and facilities for their services,” Doran says.
Reference-based pricing, he continues, was developed to help reduce medical spending by defining, up front, what a plan will pay for services based on industry benchmarks or common provider charges. The company can use reference-based reimbursements instead of traditional Preferred Provider Organization network discounts to set levels for provider reimbursements and define them in the plan document.
“The plan language specifies the payment level based on a Medicare fee schedule or another acceptable reference when calculating reimbursement, or it uses that defined cost plus a certain percent,” he says.
Doran expects to see increased use of reference-based pricing in the next several years, in addition to expanded use of captives, level-funded programs for smaller employers, and a focus on pharmacy benefit management to contain rising drug costs.
For more information:
Guardian Life Insurance Company of America
HM Insurance Group
Swiss Re Corporate Solutions
Sun Life Financial
Len Strazewski is a Chicago-based writer, editor and educator specializing in marketing, management and technology topics. In addition to contributing to Rough Notes, he has written on insurance for Business Insurance, Risk & Insurance, the Chicago Tribune and Human Resource Executive, among other publications.