Self Funding & Medical/Rx Stop Loss
Part 1
I’m keeping Part 1 short and sweet so I can get the main points of medical stop loss across before diving deeper into the actual mechanics of underwriting and the leverage found in this type of insurance. This series will eventually discuss how this impacts drug and healthcare services pricing. I hope you enjoy. As always @KarstResearch on X/Twitter, DM’s are open. Nothing I say is advice. For a primer on the US Health Insurance and Pharmacy Benefit space see my post:
Definitions:
Surplus Premium – the amount of premium left over after the insurer pays out all the claims for a given plan year.
SL – stop loss.
Aggregate Corridor – the percentage (ie. 25%) above the expected claims that a plan sponsor needs to breach before aggregate stop loss kicks in. Simply referred to as “corridor.”
Few realize that medical stop loss exists outside of those that cover this space, work in the industry, or are a buyer of medical SL Prior to diving into what this all means, I’m going to describe to you the basic funding mechanisms within the US healthcare insurance industry for employer groups.
Fully Insured
Self-Funded
Fully insured arrangements are simple – XYZ Corp pays a premium to a health insurer and the health insurer covers all eligible claims. It’s easy administratively and the premium covers any claim no matter how high the medical loss ratio (MLR) may become. This is the arrangement almost everyone thinks of when they hear about health insurance.
Example: XYZ Corp purchases a health plan for their employees, the cost is $2,000,000/yr. XYZ Corp’s obligation is to pay the premium in monthly installments. In a situation where at the end of the year XYZ Corp has a medical loss ratio (MLR) of 200%, meaning $4,000,000 in claims, there is no burden on XYZ Corp or impact to them during that plan year. However, if XYZ Corp has a 50% MLR, meaning $1,000,000 in claims, the insurer keeps the entirety of the surplus premium remaining.
A fully insured arrangement gives the employer/employees access to a medical network, pharmacy network, and the associated discounts with those services. In a fully insured arrangement, the claim is paid for by the insurance company after you have met your deductible and out of pocket maximum.
Self-funded arrangements are typically used by larger employers or employers with significant cash flows. In this arrangement the employer purchases stop-loss insurance and covers the initial healthcare costs for its employees up to a certain dollar amount when the stop-loss insurance kicks in. It is typically cheaper than being fully insured in the long run but requires far more work and management. Self-insured groups also have far more control over their healthcare costs due to the increased visibility of claims. excerpt taken from:
One difference between fully insured and self-funded is that if you are fully insured the insurer insures the *employee*, whereas with a self-funded health plan the employer is the primary insurer and they “rent” the medical/Rx network from a health insurer (Cigna, Aetna, United Healthcare, BCBS). The structure of accessing healthcare is the same, the difference is in the funding.
So, what is medical stop loss? In short, it’s insurance for the *employer’s* claim liability associated with a self-funded health plan. The stop loss has a deductible that must be breached prior to the SL insurer paying claims. Upon breach of the deductible, the employer will be reimbursed (or fronted) the claim payment in excess of the deductible. There are two types of coverage in medical stop loss: (1) specific, commonly referred to as spec and (2) aggregate, commonly referred to as agg.
Specific stop loss
Spec protects the employer from an outsized claim for any single plan member.
The specific stop loss has a deductible, typically larger than $50,000.
Aggregate stop loss
Agg protects the employer from an outsized number of claims from numerous members of the population that are below the specific deductible (I will elaborate on this later).
The aggregate stop loss kicks in following a percentage (typically 125%) of expected claims determined by an underwriter. This is commonly referred to as a corridor.
An example of specific and aggregate stop loss is the following structure:
$200,000 specific stop loss deductible
125% of aggregate claims. Maximum benefit of $1,000,000.
In this example there are six *unique* claims that have been incurred by members of the health plan (these amounts are by no means unrealistic. The red line is where the specific deductible of $200,000 is set.
Any amount above the specific deductible is reimbursed by the stop loss carrier, the amounts below are the responsibility of the health plan sponsor. The amounts below the red line will accumulate to the aggregate stop loss. Here is how these six claims will impact the stop loss.
$99,000
$293,650:
$93,650 over the $200k deductible, this amount is reimbursed.
$40,000
$80,000
$150,000
$765,430
$565,430 over the 200k deductible, this amount is reimbursed.
The amount that accumulates towards the aggregate stop loss in this scenario is all of the claim amounts up to $200,000, so $619,000 has accumulated towards the aggregate stop loss.
In part 2 and 3, coming within a few weeks I am going to discuss how the medical stop loss insurers underwrite risk, how they reach an aggregate corridor, how healthcare/Rx risk is viewed by underwriters, how the healthcare funding landscape is inherently levered, and an example of an underwriting workup.
I apologize for the delay in my posts. I had become exceptionally busy, but I am back and better than ever. Your support is much appreciated. This post will be made free for all subscribers. Part 2(/3) will likely not.