Managing Self-insured Losses Under Health Care Reform

In our last post, we talked about impact of the Patient Protection and Affordable Care Act (PPACA), aka health care reform, on self-insured health plans. Now, let's take a closer look at the impact the PPACA is likely to have on the decision whether to purchase stop-loss insurance coverage and, if so, at what level.

First, let's look at the decision whether to purchase stop-loss coverage. For many companies, particularly smaller companies, stop-loss insurance makes self-insured health benefit plans possible. While larger companies (those with 1,000 or more employees) can more easily predict their claims and spread any large losses over a larger employee base, smaller companies could see their health care costs be significantly skewed by just a few or even one large claim. As a result, a company that spent $1,000,000 one year could see claims double or worse the following year.

By purchasing stop-loss insurance to cover claims over a certain amount per participant or for the plan as a whole, smaller self-insured companies gain more control over their risks. In addition, by pre-funding stop-loss deductibles in a reserve account, companies can be prepared in case their health benefits claims reach the full amount before stop-loss coverage kicks in. The chart below shows the prevalence of stop-loss coverage in self-insured plans and at what point stop-loss coverage kicks in.

Thanks to the PPACA, even companies that have long self-insured their health benefit plans should take a fresh look at the decision whether to have a stop-loss insurance policy in place and the point at which that coverage begins. For example, the PPACA will eliminate annual and lifetime limits beginning in 2014, potentially leaving employers without stop-loss coverage with more risk exposure than they realize.

Edward Kaplan, national health care practice leader with The Segal Company in New York, suggests other circumstances in which companies may need to revisit the decision to purchase stop-loss coverage. Even plans that have stop-loss coverage in place should make sure that policy is up to date and does not have any gaps in coverage, and that the company is getting the best possible rate.

1. Changes to enrollment levels. Now that plans must allow employees to purchase coverage for their children up to age 26, this could have a significant impact on overall plan enrollment. Layoffs or adding new employees groups—for example, following an acquisition or benefit plan consolidation—can also affect enrollment levels. Therefore, companies facing these circumstances may need to revisit their stop-loss coverage or their decision not to purchase it to make sure that decision is still appropriate and coverage levels are still adequate as plan enrollment and demographics change.
2. Changes to the plan's financial position. Stop-loss coverage can also make sense if the health plan's cash reserves are low. Some insurers provide minimum premium funding options for companies that need a more predictable monthly cash flow, says Kaplan.
3. Potential large claims or claims volatility. If employees tend to go outside of the health plan's provider network, the company is likely to have less control over those provider charges which, in turn, can lead to inflated catastrophic claims. By running "what-if" scenarios, CFOs can see how the plan's reserves will withstand one or more large claims. Finally, if the number and amount of claims fluctuate significantly, stop-loss coverage can be more appealing.