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Financial Planning > Tax Planning > Tax Loss Harvesting

Choosing the Right Stop-Loss Carrier

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Medical stop-loss coverage has become increasingly popular with employers who self-fund employee health insurance. With so many providers in the market today, shopping for the lowest premium may not be the best approach — substantially lower premiums may be indicative of serious contract or service weaknesses. When searching for a stop-loss carrier, look closely at the carrier and the contract to ensure that your company is protected in the event of a catastrophic claim.

The Carrier

When you look beyond premium, stop-loss carriers vary by financial strength, service, pricing, and underwriting philosophy.

The financial strength of the carrier is a major concern. Stop-loss claims can be huge, sometimes reaching into the hundreds of thousands — even millions — of dollars. You should be confident that your carrier has the resources to pay a catastrophic claim. Discuss prospective carriers with your broker and research independent ratings by Moody’s, A.M. Best, and Standard & Poor’s.

Going beyond premium, consider what services are included in the quote. Features such as PPO discounts and rate lock-ins can be used to compare carriers. Large case management is another way carriers give value back to employers. With large case management, the stop-loss carrier provides employers with resources to manage catastrophic events. These may be opportunities to lower costs on specialty claims, such as cancer, premature births, high-risk pregnancies, and organ transplants. The carrier may have established relationships with networks and managed care services, providing negotiated discounted rates. Besides passing these discounted rates on to you, these relationships also give you access to additional cost-controlling resources.

The underwriting philosophy and risk retention are also important distinguishers. Some carriers are able to retain nearly all of their stop-loss risk. This means that they are able define their underwriting policies and make independent claims decisions. Carriers that are unable to retain most of their risk may buy high levels of reinsurance through another carrier, meaning they will insure themselves for pay outs over a certain amount in the event they need to pay a very large claim or many claims at once. Some carriers retain as little as 10% of their own risk.

High levels of reinsurance can also adversely affect your claims. Claim payments may be subject to the reinsurer’s review, which may result in long delays of claim determination and payment.

These characteristics are a good place to start when deciding on a stop-loss carrier. Once you’ve narrowed down your choices, it’s time to look at their contracts.

The Contract

The fine print in stop-loss contracts can have a huge impact on your business whether you have 100 employees or 10,000. The two main contract pitfalls are lasering practices and contract limitations.

oLasering is the practice of excluding an employee who is expected to incur high medical costs, or applying a higher deductible to that individual. Since expected claims on these known claimants could easily exceed the stop-loss premium, lasering these individuals when you buy a new policy is a common practice. What to look for: lasering when your contract renews. Be aware of the stop-loss carrier’s lasering-at-renewal practices before choosing a carrier.

oContract limitations are internal limits set for events such as experimental treatment, clinical trials, transplants and alternative care. The policy may set a maximum reimbursement for these types of claims, or the policy may exclude coverage. Would your company make up the difference in the cost of care in one of these internal limits?

The following product features may be offered by some carriers so you can customize your company’s contract to your needs. When choosing a stop-loss carrier, make sure it offers all the options that are important to your company now, or may become important in the future.

oTerminal liability gives you the option of extending your stop-loss coverage should your company decide to discontinue the plan. This feature gives you financial protection while you transition to a fully insured medical plan by covering claims run-out and catching claims that might otherwise fall in the gap between plans.

oHealth conversion is an option that allows employees to convert their group medical plan to an individual medical policy when employment terminates. This is different from COBRA – the health conversion policy remains active as long as the premium is paid, and does not expire after 18 months.

oAccelerated or simultaneous reimbursement is an optional service provided by the carrier to rush a stop-loss reimbursement to the employer. These are typically done with large reimbursements that might cause cash-flow problems.

oClinical trials coverage extends stop-loss protection to certain clinical trial claims, which would ordinarily be excluded from most policies.

oAggregating specific deductible allows employers to assume more risk with their specific stop-loss coverage, in exchange for lower premiums. This option adds a second layer of specific deductible that must be met before reimbursements are made, and it is attractive for larger employers.

oMonthly aggregate reimbursement gives an employer the opportunity to access their aggregate coverage on a monthly basis instead of through an annual reimbursement. This feature is especially helpful for smaller employers, and it may be offered by the stop-loss carrier as part of its contract.

Before considering stop-loss coverage, the underlying plan provisions should be written to assure the intentions for coverage, limitations, and exclusions are clearly outlined in the summary plan description. The employer should look for a stop-loss policy that provides needed coverage and minimizes or eliminates any gaps in coverage.

When deciding on a stop-loss carrier, the financial strength, service, and pricing of the provider must be thoroughly reviewed. It is also critical the contract provisions fit your company’s needs. When you stop shopping for the lowest premium and look at these features, you can be assured you’ve picked a stop-loss carrier who can help you manage any catastrophic claim.

Christopher C. Brown is vice president, stop-loss product in the employee benefits group at Sun Life Financial U.S., Wellesley Hills, Mass. He is a member of the government relations committee of the Self-Insurance Institute of America, Simpsonville, S.C.


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