Health Plans Online Health Home 1 Health Home 2 Sign In Need Advise Web Meeting
Partial Self-Funding of Group Insurance Benefits

Small employers are rarely presented with healthcare proposals other than traditional fully insured plans.  This is because most agents do not take the time to fully understand the benefits of self-funding, so they hesitate to present these options to employers.  Instead they tell employers "you don't want to take this risk, self-funding is only for large companies."  With rising healthcare costs we believe many employers with over 10 employees should understand how to limit the risk and enjoy the cost-control benefits of “partial” self-funding.

Stop-loss insurance is used frequently by self-funded medical plans to limit the exposure an employer will have on catastrophic claim costs. It is not necessary to use stop-loss insurance for dental, vision, or short-term disability benefits as these are predictable costs with relatively low levels of claims exposure. Stop-loss insurance is essential for any employer who elects to be self-insured on their medical plan.  This allows employers to minimize risks while lowering the cost of their healthcare plan.

Aggregate and Specific Stop-Loss Defined

Aggregate stop-loss insurance limits the dollar amount of claims that an employer is responsible for on total claims paid within the terms of the policy. The terms of aggregate stop-loss contracts can vary considerably depending on the carrier.  Some contracts provide monthly aggregate protection rather than annual protection.  Monthly caps help small employers budget potential claims cost without exposure to higher annual claims.  It is the brokers' and consultants' responsibility to totally understand the terms of the stop-loss contract, and to make the appropriate recommendations to the employer.

Specific stop-loss insurance limits the dollars that an employer can pay in any one plan year on any one person during the term of the contract. As with aggregate stop-loss, contract terms can vary considerably. The broker/consultant has a responsibility to understand and explain these differences to the employer.

Purchase of Stop-Loss Coverage

Some employers choose to purchase neither aggregate nor specific stop-loss insurance. These are most often giant corporations with the resources to accept risk and the desire to eliminate the fixed costs associated with insuring the plan.

Aggregate stop-loss insurance is generally purchased by small-to-medium-sized employers with less than 1,000 employees. The risk of a 1,000 plus employee group exceeding their aggregate stop-loss limit is quite small. This is reflected in the relatively small premium charged by insurance companies for larger employers. Below is a chart explaining the most common coverage for various time periods.

STOP-LOSS PLANS

INCURRED DATES OF
ELIGIBLE CLAIMS

PAID DATE OF
ELIGIBLE CLAIMS

12/12

In plan year

In plan year

12/15

In plan year

In plan year and for 3 months
after end of plan year

12/24

In plan year

In plan year and for 12 months
after end of plan year

15/12

In plan year and
3 months prior

In plan year

Paid

At any time

In plan year

Table 1

Premiums for specific stop-loss coverage are considerably higher than aggregate protection, but decrease as the stop-loss level is raised from $10,000 to $25,000 or higher, per person, per year. The level an employer selects is based on the size of the group and the willingness to accept risk. Risk tolerance varies from company to company and is typically decided by the financial officer of the company, not the human resource manager.

Specific and Aggregate Stop-Loss Contract Options

How a claim is classified is important to a full understanding of stop-loss contract options.  In these contracts, there are two types of claims:

  1. Incurred Claims - Expenses incurred on a specific date.
  2. Paid Claims - Claims paid on a specific date.

Typically, two to three months of incurred claims may have not yet been paid. This represents 20 to 25 percent of annual claims. Insuring these incurred but not yet paid claims is an important consideration in any partially self-funded plan.

Specific Stop-Loss Insurance

  • Places a limit on paid claims for any one person in a plan year.

Aggregate Stop-Loss Insurance

  • Places a limit on paid claims for the entire group in a plan year.

Table 2 shows when to use the various types of stop-loss insurance and their relative costs.

  PLAN

APPLICATION

COST

12/12

Leaving a fully insured plan and going to a SFP* or leaving a SFP that has a 12/15 or 12/24 policy and going to a new SFP.

Least expensive of all policies. Claims must be incurred and paid in a 12-month period.

12/15

Same as 12/12

More expensive than 12/12

12/24

Same as 12/12

More expensive than 12/15

15/12

Existing stop-loss policy terminates when leaving a SFP. Insures the runout claims incurred in prior plan year but paid in current plan year.

25% higher than 12/12. May not be available if there are employees with major ongoing claims.

Paid

On the renewal of an in-force, stop-loss policy.

25% to 30% more than a 12/12 plan.

Table 2 *SFP - Self-Funded Plan

Case Examples

Careful planning and the proper use of the appropriate stop-loss policy can eliminate or greatly reduce gaps in insurance coverage.

Assume a manufacturer with 100 insured employees changes from one self-funded administrator to another.  The old plan did not include aggregate stop-loss insurance and had $25,000 specific coverage on a paid contract with an insurance company.  With the new administrator, the employer also accepted a new $25,000 specific policy as part of a 12/12 contract.  The employer dealt directly with the new administrator and insurer without a benefits broker/consultant.

The new plan was effective November 1. In early October, a dependent spouse delivered premature twins with medical expenses of $500,000 on the children.  The claim was not paid until January and neither claim was insured.

Had a 15/12 contract been purchased, the employer's liability would have been capped at $25,000 per person.   It ended up costing the employer $450,000.  Why wasn't a 15/12 plan recommended and implemented in this case?  It could be that several administrators and insurers were competing for this client's business and a 12/12 was offered because it had the lowest premium. The employer's benefits manager didn't understand the risks of coverage gaps in 12/12 policies.

A 15/12 contract would have insured all expenses incurred in August, September, and October and paid in November or later. Because the employer has employees in multiple locations, it was difficult for the human resources department to be aware of large pending or recently incurred claim charges that were unpaid as of the changeover date.

In another example, an employer with 75 insured lives was covered through a self-funded plan with a $15,000 specific policy and an aggregate policy.

Because of very high renewal costs, the employer decided to move to an HMO/POS plan. This was a fully insured plan with attractive rates and benefits. Before making a change, the client was asked by the broker to poll every employee to see if there were any large incurred claims. The current specific policy was a paid contract and wouldn't insure claims paid after termination of the policy. The fully insured plan wouldn't pick up any expenses incurred prior to the plan's effective date, so there was a potential for gaps in coverage.

The HR manager found no large claims pending, but was told that an employee went to the hospital for one day for his heart condition but was back at work the next day. They changed to the HMO/POS insured plan. Two months later a bill for $49,000 was submitted for one day at the hospital! As a result, the employer had to fund the entire bill since it was incurred under the self-funded plan but unpaid at the termination of that plan. Even good and careful planning was not enough here.

Employers should purchase "terminal liability" protection to limit potential claims when leaving a self-funded plan.

Summary

As we have shown, there are also risks associated with leaving a self-funded plan whether an employer is just changing administrators or moving to a fully insured plan.  Partially self-funded plans, while offering flexibility, reduced fixed costs, and the potential for lower overall costs, do shift more risk to the employer.

A good benefits broker educates clients about both the rewards and the risks.  Contract terms that must be fully discussed include monthly caps on aggregate insurance, immediate reimbursement on specific claims, the withdrawal of a stop-loss insurer from a state, the carve out of named individuals from the stop-loss contract, and the problems arising when the claims processor pays a claim and the stop-loss carrier declines the reimbursement.

Recommendations in this complex area require careful deliberation by the broker/consultant, as well as complete recognition by all parties to potential risks.  Understanding and controlling these potential risks may bring great financial rewards to the innovative employer who wants to control rising benefit costs.