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SELF-FUNDING & STOP LOSS 101

OBJECTIVES


Explain the history and evolution of self-funding
Describe the advantages and items an employer should consider when
self-funding
Identify the basic concepts of stop loss, including specific and aggregate
coverage, maximums, contract types, leveraged trend and carrier selection

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including premium taxes and mandated benefits 3 .SELF-FUNDING BASICS — Self-Funding • Employer funds/pays its own claims rather than buying traditional health insurance • Employer often delegates administrative responsibilities to a TPA/Insurer/HMO • Employer can manage its exposure to catastrophic claims expense by purchasing stop loss insurance (excess risk) — ERISA (Employee Retirement Income Security Act) (1974) • Formally recognized Self-Funded Plans • Specifically exempts most self-funded employee benefit plans from state regulation.

ALTERNATIVE FINANCING Who Assumes the Risk? Fully – Insured Plans Retrospective Premium Agreements Minimum Premium Accounts 100% Transfer of Risk Self-Funded ASO w/ Stop Loss Insurance Pure SelfFunding (ASO) No Transfer of Risk 4 .

SELF-FUNDING ADVANTAGES FOR AN EMPLOYER — — Group controls the plan. not the insurer Group can take advantage of their own good medical experience • Can result in more effective healthcare cost control — Employer Can be very flexible in health plan design • ERISA applies. often in lieu of state-mandated minimum benefit levels. easing administration of multi-state plans — Eliminates most state premium taxes (savings of 2-3%) 5 .

— — Eliminates most risk charges and profit margins charges by insurers Employer may purchase stop loss to reduce its exposure to losses due to catastrophic claims and create more predictability 6 .SELF-FUNDING ADVANTAGES FOR AN EMPLOYER — May help employers cash flow • Pay claims as incurred – no pre-funding or up-front reserve payments • Reserves held by employer instead of insurance carrier. Interest paid on these reserves also remains with the employer.

SELF-FUNDING CONSIDERATIONS FOR AN EMPLOYER — — — — Risk Assumption/Risk Aversion Cash Flow Unpredictably Poor Experience Assets Exposure • General Asset Plan • 501 (c) (9) Trust Account — — Fiduciary Responsibility Risk Suitability 7 .

RISK SUITABILITY What type of claims to fully insure? — What type of claims to selffund? Unpredictable: low frequency. high frequency Examples • Life/AD&D • Long Term Disability • Medical • Dental • Vision 8 . high severity — Examples Predictable: low severity.

Stop loss cannot pay providers or employees of the employer. 9 .WHO IS INSURED? — Employer / Plan Sponsor • The employer has made a promise to provide benefits • Existence or absence of stop loss does not change that promise — The individual / participant is NOT the insured • Stop loss reimburses the employer / plan sponsor for any claims the plan has paid over the stop loss deductible * Stop loss policy reimburses employer for losses associated with providing health benefits to employees and dependents.

TWO FORMS OF STOP LOSS COVERAGE 10 .

SPECIFIC (INDIVIDUAL) COVERAGE — — — — Reduces the employer’s exposure to high-cost individuals Employer pays all claims for each individual Stop loss carrier reimburses the employer for claims on individuals whose annual eligible* expense has exceeded the specific deductible At each contract renewal. 11 . each individual will be subject to a new specific deductible * Note: Eligible and reimbursable expenses under the terms of the stop loss policy may differ from the employer’s plan document.

Her claims total $300.000 deductible.000 Amount reimbursed by Stop Loss Carrier: $225.000.000 12 . Jane’s employer is self-funded. Total Claim: Employer Deductible: $300.SPECIFIC (INDIVIDUAL) COVERAGE Example Jane Smith suffers from renal failure and undergoes kidney dialysis.000 $75. but has purchased specific stop loss with a $75.

13 . May be sold as a “stand-alone” product (aggregate is not required) * Note: Eligible and reimbursable expenses under the terms of the stop loss policy may differ from the employer’s plan document. fee negotiation. such as case management.SPECIFIC (INDIVIDUAL) COVERAGE — Eligible* Expenses • Medical • Rx — Ineligible expenses • • • • • Dental Vision Capitation Administrative fees Can also include certain vendor fees. etc.

* The following is a guideline for setting the specific deductible level for cases quotes with aggregate coverage: * Note: some states have mandated restrictions on specific stop loss levels. 14 .SPECIFIC DEDUCTIBLE LEVELS — — Minimum and maximum guidelines for appropriate specific deductible levels are based on expected claims and the size of the group.

claims accumulations will be subject to a new aggregate deductible. • Claims in excess of the specific deductible are removed from the claims that apply toward the aggregate deductible.AGGREGATE COVERAGE — Reduces the employer’s exposure to high levels of claim utilization on the group as a whole. • At each contract renewal. rather than specific individuals. 15 . • The stop loss carrier reimburses the self-funded employer for all eligible claims that exceed the aggregate deductible.

• At each contract renewal.AGGREGATE COVERAGE — Reduces the employer’s exposure to high levels of claim utilization on the group as a whole. 16 . • Claims in excess of the specific deductible are removed from the claims that apply toward the aggregate deductible. rather than specific individuals. • The stop loss carrier reimburses the self-funded employer for all eligible claims that exceed the aggregate deductible. claims accumulations will be subject to a new aggregate deductible.

Dental and Vision claims Aggregate coverage will not be sold alone.AGGREGATE COVERAGE — — — Aggregate coverage is offered at 125% of the expected claims Aggregate coverage can also cover Rx. • Aggregate coverage does not provide “catastrophic” coverage • Specific “protects” the Aggregate 17 .

groups should not have aggregate claims.” depending on the amount of credible experience available. except in years of extreme changes in payment patterns or large changes in utilization.AGGREGATE EXPERIENCE AND CREDIBILITY — — — — — — Group’s actual claim experience and manual rating are “blended. The industry standard for the aggregate corridor is 25%. This figure is considered “expected claims” A “corridor” is added. The corridor is the margin or cushion the underwriter includes to limit the frequency and severity of aggregate claims. By design. 18 . creating the annual aggregate deductible.

AGGREGATE REPORT EXAMPLE 19 .

UR. — Variable Costs • Expected Claims — Total Costs • Fixed • Variable — Maximum Costs • Fixed • Attachment Point (Expected plus Corridor) 20 . etc.SELF FUNDED / STOP LOSS COST DEFINED — Fixed Costs • Specific Premium • Aggregate Premium • Administration Fees – TPA. PPO Network.

total claims would have to exceed the expected claim figure by 25% plus $1.000.000.000.000.STOP LOSS MAXIMUMS — Specific • Standard individual lifetime maximum is $1. remind them that in order to hit this maximum. 21 .000 • This is a separate limit from the specific stop loss maximum • If an employer feels this is too low.000 • Higher individual lifetime maximums are available at an additional cost • Make sure the stop loss maximum is in agreement with the employer’s plan document — Aggregate • Standard annual limit is $1.

Have been adjudicated and approved. as of the date shown in the contract basis. and 4. and 2. and 3. A check or draft for remuneration is issued and deposited in the U. 22 . mail. are: 1. Covered and payable under your employee benefit plan. Sufficient funds are on deposit the date the check or draft is issued — Incurred: The date on which medical care or a service or supply is provided to a covered person for plan benefits under the employee benefit plan for which a charge results.S. or other similar conveyance or is otherwise delivered to the payee.TWO IMPORTANT DEFINITIONS — Paid: Charges that.

There are no time requirements for when the claim is paid. the claim must be incurred in the contact period. a claim notice must be submitted within 12 months after the policy period. the specific contract will remain an incurred contract. However. 23 . Appropriate if group is currently fullyinsured or has run out protection with current stop loss carrier.INCURRED CONTRACT — Incurred contract – to be eligible under the specific. For renewal years.

This is an abbreviated version of the “true incurred” contact. 24 . Variations include 12/18 and 12/24 contracts.12/15 CONTRACT — Incurred in 12 and Paid in 15 (12/15) – Eligible claims must be incurred during the contract period and paid within the contract period or the three months immediately following.

12/12 CONTRACT — Incurred and Paid (12/12) – Eligible claims must be incurred and paid within the policy year. This is an appropriate first-year contract type for a group that is currently fully-insured or a group that is self-funded and the policy has a run-out provision. For renewal years. as long as it was incurred on or after the initial effective date of the contract. the contract will convert to a paid contract and the claims will be eligible under the renewal contract regardless of the date incurred. 25 .

as long as it was incurred on or after the initial effective date of the employer’s self-funded plan. This is appropriate for renewal contracts that started out as 12/12 or 15/12 contracts. 26 .PAID CONTRACT — Paid – on renewal. Claims will be eligible under the renewal contract regardless of the date incurred. a 12/12 or 15/12 contract becomes a paid contract.

27 .15/12 CONTRACT — Run-In (15/12) – Claims incurred up to 90 days before the effective date and paid during the first contract period will be eligible under the policy. but is new to the carrier. the contract will convert to a paid contract. This is appropriate for a group that is currently self-funded with no run-out provision. For renewal years.

sex. Corridor – the margin or cushion the underwriter included to limit the frequency and severity of aggregate claims. which are variable although often capped.GLOSSARY — — — — — — — — — — — — Fixed Cost – All firm dollar costs of a self-funded plan. Includes specific premium. Fiduciary – any party who has discretionary authority or responsibility for the management or administration of a plan. 28 .” ASO – Administrative Services Only. Census – A collected detail of an employer’s member population. Self-funding (Self-insurance) – These terms are interchangeable. administrative fees. Plan Document – A document which details the terms and provisions of a plan.” Soft Dollars – Claims costs. and other demographic information. A term used by carriers and HMOs to designate the service they provide to self-funded employers. aggregate premium. coverage status. etc. TPA – Third Party Administrator MCO – Managed Care Organization ERISA – Employee Retirement Income Security Ace of 1974 Experience – a detail of the actual claims paid during a specified time period a particular employer group’s covered members. date of birth. including number of covered lives. Also called “hard collars. Also referred to as “claim liability” or “attachment point.

QUESTIONS ??? 29 .