Most of today’s employers are dealing with a changing business landscape—a landscape that is full of emerging and global risks of all types. They face a litany of problems that many are struggling to resolve. And one of the most significant of these issues has been controlling the costs of group health insurance. Despite the adoption of the Affordable Care Act (ACA), costs have continued to rise, albeit at a slower but still unacceptable pace. According to a 2015 Kaiser Family Foundation and the Health Research & Educational Trust survey of employer-sponsored health benefits, average annual premiums for employer-sponsored family health coverage rose 4% in 2014. Since 2005, premiums have grown an average of 5% annually, compared to 11% annually between 1999 and 2005.
The study notes that there are several methods that can help reduce costs for employers. One of the solutions most often stated is self-funding of the group health coverage. “We are seeing quite a bit of activity in the self-funding market,” points out Greg Wilden, senior vice president, stop loss sales, HM Insurance Group (HM). He points out that while most large employers have already moved to the self-funded approach, “today most of the activity is directed at middle market accounts, those that involve between 100 to 700 lives.”
The primary reason for self-funding is to provide a costeffective approach to providing health insurance benefits to employees. And for the most part, this approach has met its goal. According to HM, self-funding now accounts for over 61% of all private sector employers’ employee health plans. HM indicates that there are a number of advantages generally associated with self-funding. They include:
• Reduced costs by doing away with profit margins,
• Increased flexibility in plan design, and
• Better control of claims and related expense.
These advantages have allowed employers to effectively utilize a proactive approach to program costs. Self-funding has assisted employers in their quest to control health care costs.
Self-funded programs allow the employer to assume a portion of the risk, while maintaining a predetermined layer of protection. Key to developing a viable self-funded program is the ability to obtain this catastrophic insurance protection via “stop loss” insurance. While there are frequently differences in actual coverage from carrier to carrier, most self-funded programs consider the stop loss protection as a key element of the overall coverage. In that regard, many stop loss coverages are “designed to pay for catastrophic health insurance claims that exceed the employers’ predetermined level of risk tolerance.” At its core, stop loss coverage is made up of two distinctive potentially catastrophic loss elements.
The first element of the stop loss coverage is the “specific stop loss” insurance. This coverage is designed to provide catastrophic protection from medical claims that arise from large losses attributed to a single employee or dependent. The “specific” is intended to limit the employer’s financial exposure from a single claim. The other area of coverage that is incorporated within the stop loss coverage is the “aggregate stop loss” protection. This aspect of the coverage is centered around providing “a limit on the dollar amount of total claims spending during the contract period.” Coverage is intended to reimburse the employer for total claims that exceed a deductible. Its primary purpose is to protect the employer from a large number of claims across the employee population. If effective, the stop loss coverage is designed to shield the employer from severity-type claims (specific stop loss coverage) as well as frequency-type losses (aggregate stop loss coverage), thereby limiting the employer’s exposure to financial consequences of adverse loss development.
As noted above, self-funding has become a popular and viable method to lower the costs of employee health protection. So it is easy to see why this approach has such strong support by employers. However, the emergence of several recent events is causing an increasing interest in this approach.
The first event was the enactment of the ACA, which had several new features that have proved challenging to employers. The major issue was the elimination of both the employee’s annual and lifetime dollar limits on essential health benefits. The second issue that is causing concern among employers is the prevalence of high-cost claims which have risen dramatically from both a frequency and severity standpoint.
Self-funding of health benefits has been around long enough to see a number of different approaches to stop loss coverage. As Wilden points out, “We are aware that there are a number of alternative methods appearing in the stop loss market.” For example, he says that retro-type contacts are being used with increasing frequency. He also points out that “group aggregate programs are also gaining popularity.” However, all too often, “these programs just turn out to be little more than smoke and mirrors.” Frequently, the employers and brokers are not clear on the specific coverage details.
One of the hot topics in the stop loss market over the last few years is using a captive to serve as the focal point. “Following the passage of the ACA, there was a huge uptick in interest in captives. You could not attend a conference several years ago that did not have several educational sessions devoted to captives.” But when you look at the total cost, including the startup cost of the captive, Wilden says, “this approach may not always be the most cost-effective.” He also indicates that interest in captives generally has decreased over the last year or two; and for HM it was a non-issue at last year’s renewals.
The distribution method used to market a product is extremely important. HM depends on independent agents/brokers to market their products. HM’s approach is that they are open to any broker that is interested in developing a relationship. Over the years, the company has gained an insight into just how important it is to provide continual educational efforts for its brokers. As a result, HM has developed specific courses that are offered in most regions of the country. In addition to providing recent and relevant knowledge, the courses provide CU credits and are approved in all 50 states.
As with most of the insurance industry, the stop loss market has gone through a number of challenges over the past few years. However, Wilden believes that many of the challenges that are being faced today by employers will be even more significant as time goes on. Among the issues that are at the top of the list are rising pharmaceutical costs, especially for specialty drugs, many of which can cost $10,000 a month or more. A recent white paper that HM prepared on this subject, HM Trend Watch: The Rising Costs of Specialty Pharmaceuticals, notes a number of troubling issues, including the fact that $87 billion was spent on these drugs in 2012. However, it could exceed $400 billion by 2020. HM further indicates that there were 300 specialty drugs on the market in 2012; but this number is projected to balloon to over 5,000 as new drugs fill the development pipeline. These statistics, as well as others summarized in the white paper, paint a clear picture of the areas that will need to be addressed as the stop loss market moves forward.
“This makes it difficult to manage loss ratios and, as a result, too many carriers are looking for strategies that allow them to reduce the cost of claims,” Wilden says. Unfortunately, some insurers have begun delaying the payment of claims as a mitigation strategy. Other trends he sees are “the continued use of retros as well as the use of multi-year rate caps.” Currently, rate caps are typically limited to two years; however, some three-year caps are starting to show up. For the most part, HM is using the two-year rate caps, Wilden notes.
Bottom line, stop loss coverage is here to stay. The mid-sized employers are now seeing the advantages that large employers have known for years. Self-funding is a valid approach to controlling the cost of an employer’s group health plan. Agents and brokers who have clients who could benefit from self-funding should be discussing this option with them. And brokers/agents who do not have a book of health care clients may wish to consider self-funding as a “door opener.”