Congressional Questions & Answers On Stop-Loss aka Reinsurance
Congressman Kurt Schrader, Oregon
Mr. Michael W. Ferguson, President and CEO
Self-Insurance Institute of America, Inc.
Simpsonville, SC
Ms. Robin P. Frick
Combined Benefits Administrators, Inc.
Madisonville, LA
Congressman Kurt Schrader, Oregon
“How does that stop-loss really work? I would ask Ms. Frick the same question in a minute. Why is it not a loophole and why is this remotely possible for small business?”
Mr. Michael W. Ferguson, President and CEO
“Sure. I am glad you asked that question, so let us explore actually both of those variations.
The issue about the loophole is that there is concern or express stating that somehow self-insured plans are these unregulated entities that are out there and are sort of operating in kind of the Wild West. But, the fact is if you put a finer point in it, what we are really looking at in this discussion is what is the trend. Employers that are moving to self-insurance post-ACA. And by definition, those plans would be non-grandfathered self-insured plans. We have got two varieties–the grandfather and the non-grandfathered self-insured plans. So all of those plans that are moving to self-insurance would be non-grandfathered plans, and as such, they are subject to almost all of the regulations under the ACA. There are a few. There are about three or four that they are not subject to, and there are particular reasons why they are not applicable to self-insurance. Because essentially, self-insurance plans are the equivalent of nonprofit health plans. They are not in the health insurance business. They are widget manufacturers. And so in addition to that, not only are they regulated by the ACA, they are also regulated by ERISA. Also, HIPAA, COBRA. There are all these other federal laws that apply. So if you are going self-insured, you are actually subjecting yourself to more regulation, not less, if you are looking from a business owner standpoint.
Now, to your question about stop-loss insurance, distinction between stop-loss insurance and health insurance. Stop-loss insurance is essentially a liability-type of insurance product between the carrier and the employer. A stop-loss insurance policy does not cover individuals, it does not pay claims, and so there is a distinction that you need to keep in mind whereby you have got the plan, the self-funded plan, and you have the participants within that plan. And those participants are in the plan, they get coverage under the plan, no matter what the stop-loss insurance arrangements are. The stop-loss arrangement is simply a reimbursement mechanism between the employer and the carrier. So the fact, any of the arrangements of the stop-loss does not affect the plan participants, whether there is a laser, which means that the employer retains liability for one or more people under the plan not subject to liability. It is simply a reimbursement mechanism. So that is a financial tool that the employer uses and really has nothing to do with the healthcare, per se, delivery for the plan participants. I hope that addressed your question.”
Congressman Kurt Schrader, Oregon
“And then, Ms. Frick, if you will chime in. So what does it cost? I mean, if the stop-loss companies are willing to assume that ultimate risk, you know, I have got only so much cash, my employee develops cancer, has this catastrophic crippling injury, you know, I do not have enough money to pay that, that is the reason I got you as a stop-loss insurer or backstop. What does it cost me to have you do that and what caveats do stop-loss companies put in to make sure they are not on the hook?”
Ms. Robin P. Frick
“Very good question.
With a stop-loss arrangement, self-funding, either you are going to assume everything without the backstop or reinsurance, or you purchase reinsurance just as you said to cover your more catastrophic risk. So rates are determined just as you would in a fully-insured market from the reinsurance but without the medical piece. The medical piece is added in after when you are looking at your specific medical claims experience and how you can turn that forward for your expected, and then the maximum liability over that next plan year.
So in the reinsurance piece, you are still taking into consideration the size of the group, the demographics, the area factors, where it is, and just the cost of what you are needing to cover. And then, how large of a deductible do you want on each bellybutton that is covered on the plan. And then if you are in that size market of say 1,000 or less, you are going to want the extra aggregate protection that protects collectively all of the bellybuttons in the plan. So you have one on each and one as the whole.
So in that perspective there is always–you have to take all of that in to develop some kind of fixed premium cost that is a known factor over the 12 months. Your claims, you do trend out and expect where they will be. It is safe to put a corridor so you have a maximum liability to which you maximum would pay out, say about 125 percent of where you expect your claims will fall, but the reinsurance provides, if I set a deductible on each bellybutton as $10,000, then after that $10,000, my plan is reimbursed by the reinsurance carrier for anything over that expectation. So there is a cost factor. The reinsurance carrier is looking at everything, looking at the claims experience, what has happened before.
Now, what is interesting is if you are moving in typically that small group market under 100, you do not get the claims experience, or if you do, it is very aggregated. It is not very specific as we have known in the past. So now it is not a guessing game but you are looking at a whole market or a pool in and of itself. So now you are having to determine across a broad spectrum what do I believe for this area, for this type of industry, for these kinds of workers, where should we place the deductible level? What do we expect out of them? An oil rigger is going to have a much higher risk factor than someone who sits behind a desk every day. So those are all taken into consideration. But the reinsurance does provide sleep insurance. I know at night that my total exposure is X. I know if I have an aggregate coverage that my total as a plan is X and there are reimbursables.”
