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Consultant on Stop-Loss: Watch for Unintended Consequences

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An actuarial consultant says well-meaning regulators who change the rules that govern the group health plan stop-loss market could promote the behavior they are trying to prevent.

William Lane, an acuary who is a principal at Heartland Actuarial Consulting L.L.C., Omaha, Neb., explains his concerns in an analysis sent to the National Association of Insurance Commissioners (NAIC), Kansas City, Mo.

The NAIC’s ERISA Working Group has included the analysis in a packet of materials posted in preparation for a working group session at the NAIC’s summer meeting, which is set to take place Aug. 11 in Atlanta.

The session agenda calls for the working group to discuss the idea of recommending guideline amendments that would increase the amount of health claim risk that small employers must keep when they use stop-loss insurance to limit the risk involved with offering a self-insured group health plan.

Lane notes that he does not want his analysis forwarded in an incomplete form. The analysis starts on page 9 in the NAIC packet.

Some health policy observers want state or federal regulators to limit small employers’ access to stop-loss insurance, to reduce the likelihood that the small employers will use a combination of self-insurance and stop-loss insurance to avoid complying with the new health plan rules contained in the Patient Protection and Affordable Care Act of 2010 (PPACA), such as rules describing the “essential health benefits” that an insured plan must offer and rate review rules that apply only to insured plans.

Regulators suggested minimum stop-loss deductible levels in the Stop-Loss Insurance Model Act of 1995

Regulators at the NAIC have talked about the idea of reducing the appeal of small stop-loss arrangements by increasing the minimum specific attachment point, or per-employee deductible; increasing the minimum aggregate attachment point, or whole-group deductible; or increasing both the minimum per-employee and minimum whole-plan deductibles.

If regulators keep the current minimum stop-loss deductibles the same, healthier small groups will continue to self-insure with the help of stop-loss plans, and sicker small groups will move into the insured-plan market and drive up the cost of insured small group coverage, according to individuals and groups that support increasing the minimum deductibles.

Lane says one challenge is that stop-loss plans with high deductibles are cheaper than low-deductible plans.

“The cost for the stop-loss insurance tends to spread the cost of high claims over more employers and tends to make bad experience less costly and tends to make good experience produce less savings,” Lane says. “If a state passes legislation that includes very high limits on stop loss insurance for small employers, such as currently proposed by the [ERISA] Subgroup, then, all other factors being equal, a small employer who anticipates good claims experience will have more financial incentive to self-fund their claims.”

A small employer could buy stop-loss with higher limits even though legislation allows lower limits, “but small employers do not generally make such purchases in today’s market environment,” Lane says.

“Raising the current limits would certainly increase the percentage of all expected claims that would be paid out of the small employer claim fund and would increase the potential loss of the small employer in years with significantly high claims. However, the probability of loss years would go down somewhat.

“The most serious consideration in raising the limits is that it could easily have the effect of financially encouraging self-funding for the small employers which believe they have the highest probability of lower than average claims. This could produce results in the market place which are in direct conflict with the stated goals of some people seeking this type of legislation.”


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