Consultant on Stop-Loss: Watch for Unintended Consequences

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.”