The Importance of Structure in Designing a Stop Loss Contract

By Kara Spence

As healthcare costs continue to rise, it is more important than ever to make sure your stop-loss contract is properly structured. Oftentimes, too much attention is given to the current year when equal attention should be given to the following years. Planning on how to structure your contract is key to mitigating potential problems in the years to come. The appropriate type of contract, in conjunction with key contract features, helps give peace of mind even in the worst-case scenarios.

When trying to decide whether an ‘Incurred and Paid’ or a ‘Paid’ contract is appropriate for the first, second and subsequent years, you need to decide what level of risk you are comfortable assuming and how much protection you are willing to pay for.

First Self-Funded Plan Year

A solid rule of thumb is for 12/12 Contracts (incurred in 12 months and paid in the same 12 months) to only be used in the first year and followed by a contract that includes protection for claims incurred, but not yet paid, during the initial self-funded plan year.

While a 12/15 contract does give 3 months of run-out protection and yields a lower premium than a 12/18 or 12/24 contract, it can still leave you quite vulnerable. Catastrophic claims incurred at the end of the plan year may not be paid in the three-month run-out period, leaving the employer liable for additional unplanned and unexpected payments that may fall outside the extended payment period. It is essential to put an appropriate contract in place for the second and subsequent years to mitigate this liability.

To guarantee that you’re not at the mercy of your stop-loss carrier, negotiate the terms of the contract in the first year to have the trifecta of guaranteed renewability, a maximum rate cap and a “no new laser” provision.

Second & Subsequent Self-Funded Plan Years

As described above, your second-year contract should depend on what you negotiated in the first year. Whether you decide to cover the gap from year-to-year upfront with a 12/15, 12/18 or 12/24 contract or at renewal with a 15/12, 24/12 or paid contract, the amount of protection and cost go hand in hand. As the level of run-in protection increases and you add features to minimize additional risk, so does the premium.

If the level of desired protection outweighs the associated costs, a paid contract may be the best choice. Paid contracts are the highest premium option, but cover all paid claims during the plan year, regardless of when incurred.

Keep in mind that if you have a paid contract there is no run-out protection. One of the best alternatives is to have the “trifecta” negotiated in each subsequent year or have the carrier add it with caveats that the features apply as long as the contract is renewed. Anytime a contract changes, additional risks and coverage gaps need to be explored and evaluated based upon the current contract at the time of change.

While determining which contract is a better fit for your client is critical to self-funding, there are many other things to keep in mind. It is important that your contract contains certain features that play a major role in your overall plan protection.

Key Stop Loss Contract Features

Plan Mirroring – It is essential for your stop-loss policy to mirror the existing plan so that there is no gap in coverage from one policy to the next. This is especially important when changing stop-loss carriers.

Terminal Liability Option (TLO) –If you decide to terminate your self-funded plan and convert to a fully-insured policy or just want to make sure your liability is always capped, this option extends your protection for three or six months to cover any run-out claims.

Monthly Aggregate Accommodation – Since aggregate policies do not provide reimbursement until the end of the plan year, it is important to have this feature in place to sustain adequate cash flow should claims exceed the aggregate level early in the plan year. This feature provides partial payments each month instead of waiting until the end of the year for reimbursement.

Advanced Funding – Regardless of how well you plan, catastrophic claims can significantly affect an employer’s cash flow. Advanced funding helps pay for a specific claim directly, instead of the employer paying up front and waiting for reimbursement.

No New Lasers – This feature ensures that stop-loss carriers cannot exclude any “risky” high claimants at renewal. Without this protection, the carriers will simply place the stop-loss level above the anticipated total for the coming year.

Maximum Renewal Rate Cap – Having a maximum renewal increase for your stop-loss policy provides an additional level of protection. This is critical, especially when you have multiple high claimants or catastrophic claims during your plan year.

Guaranteed Renewability – This feature isn’t automatically included in all stop-loss contracts and is especially important when costs rise and other carriers are not competitive. This helps ensure that your group will remain covered.

As indicated above, it is critical to have these last three features to provide the protection from year to year and not allow the insurer to leave you with a large claim that transcends two or more years.

Read the Fine Print!

Although these contract provisions are very important, they are not always outlined clearly or consistently in stop-loss proposals from carrier to carrier. As a broker, it is our responsibility to not only know what level of protection our clients want and need, but also what they are really paying for. Going forward, remember to confirm all contract specifications with each stop-loss carrier and present your options clearly with these key features in mind. Like our clients, every carrier is different and should be evaluated independently. Focusing on how the stop-loss contract is structured not only in the current plan year but for the years to come will help us to better serve our clients and their financial well-being.

Kara Spence, Financial Analyst
Employee Benefits Division
Regions Insurance