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» Managing Self-Funding Risk with Stop-Loss Insurance

June 23, 2021

Business Strategies, Healthcare Innovation, Healthcare Spending, Self-Funding

We’ve written previously about stop-loss insurance, in particular about the cost of stop-loss insurance, about the effect of CA 161 on stop-loss insurance for California groups, and about statistics around stop-loss insurance claims.

With many groups approaching their benefits renewal later this year and considering ways to reduce their healthcare spending, let’s revisit how stop-loss insurance helps a company better manage its health plan.

Role of Stop-Loss Insurance in Risk Management

The primary role of stop-loss insurance is to manage the tail risk of a self-funded health plan.

For a company that has left a bundled carrier relationship and is now paying 100 percent of claims, it is reassuring to know that the total cost of a health plan is capped at a certain amount.

The prevalence of stop-loss insurance among small, mid-, and even some large-sized groups reinforces the value it delivers to the groups looking to transfer risk of a catastrophic claims year.

Effect of Lasers for High Claimants on Stop-Loss

The 80/20 principle is an interesting phenomenon wherein for a given population, 80 percent of some result or outcome can be attributed to just 20 percent of inputs or participants.

Health care claims follow the 80/20 rule, sometimes nearly to a 90/10 ratio in some cases with large tail-risk claims. To manage the cost and exposure of stop-loss insurance policies, carriers may identify high claimants and “laser” them out of the rest of the group. The carrier will assign a higher deductible or even exclude their claims from the stop-loss insurance altogether in an effort to reduce exposure.

Reducing the Cost of Stop-Loss with Captive Insurance

Finally, groups who purchase stop-loss insurance may find that the cost of the insurance can be expensive given their cash flow.

In these cases, groups can participate in captive insurance cells for certain thresholds of risk for potentially better economic results.

A group participates in captive insurance by contributing money to a bucket, along with other groups, to purchase less expensive stop-loss insurance. The captive is a simple risk pool (insurance is just various forms of risk pools at the end of the day!) which pays claims at certain amounts, before stop-loss insurance kicks in.

Example of Medical Loss Captive and Stop-Loss Insurance

Let’s say a company was offered a stop-loss policy for $100,000 and then chooses to enter a captive and contribute $20,000 to it. The company may find that their stop-loss insurance premiums have fallen to $60,000.

If the company has high claims one year and needs to draw on the captive pool of funds, great! The pool of funds with other groups has provided them protection. If not, other companies in the captive can make claims in their bad years. And if the pool of groups as a whole are managing claims well, the captive may in fact have money left in the bucket at the end of the year to return to companies.

The captive will pay claims from say $100,000 to $250,000, where the stop-loss kicks in and will pay above $250,000. Stop-loss carriers are receptive to this arrangement as it reduces the variability in their exposures and groups like that it provides better economics for their health plan costs year over year.

Reducing Overall Benefits Costs with Stop-Loss Insurance and Medical Loss Captives

Health insurance costs are doubling every 10 to 12 years. If you’re interested in using self-funding to reduce your health plan spending, medical loss captives and stop-loss insurance are key components of your self-funding strategy.

Click here to learn more about the use of these risk management strategies and speak with a consultant today!


Posted by in Business Strategies, Healthcare Innovation, Healthcare Spending, Self-Funding