“The stop loss insurance business is an underwriter’s game. Their game plan is to avoid paying claims. They screen each prospect with claim review and disclosure requirements, and reject or rate-up anyone who may actually present a claim. The higher the deductible, the more effective this process, hence the bias to drive deductibles higher and higher. The carriers who have done best in this business have been the ones with average higher deductibles for this reason.”
By Richard Burd
Group purchase consortiums provide an excellent way for mid-sized employers to self-fund their medical benefit plans. However, the traditional stop loss market is not a very good fit to execute this strategy. To be successful with managing the self-funded risk within a consortium, a different approach can be more effective and low cost.
Traditional stop loss is an insurance vehicle driven primarily by underwriting skills. The primary goals are to “select risk” and tightly manage loss levels to the carrier’s goals. An alternative view, more suited to group purchasing consortiums, is to structure stop loss as a financing vehicle driven primarily by actuarial considerations of fair price, appropriate, spread of risk, and efficiencies of scale.
The stop loss insurance business is an underwriter’s game. Their game plan is to avoid paying claims. They screen each prospect with claim review and disclosure requirements, and reject or rate-up anyone who may actually present a claim. The higher the deductible, the more effective this process, hence the bias to drive deductibles higher and higher. The carriers who have done best in this business have been the ones with average higher deductibles for this reason.
Backing up the underwriters is a team of contract and claim experts whose job is to swat down as many in-coming claims as possible. These are the “free safeties” of the stop loss business. Their job is to scrutinize each claim for errors in disclosure, honest or otherwise, and look for matches to an array of contract exclusions that are generally more restrictive than the typical self-funded plan document.
The effect of underwriting in stop loss is to drain the value out of the policy for the policyholder. There are two ways to do this:
- Sell policies to employers who don’t need it. This is known in industry parlance as a “clean risk”.
- If number one fails, the next weapon is coverage gaps and claim denials. Industry parlance is “tight contract” and “claim audit”.
The success of aggregate stop loss insurance is similarly based on aggressive claim control. Good underwriters place the attachment at a level unlikely to breach. Experience has shown a 25% corridor, if properly placed, generally satisfies this requirement. The successful loss ratio for a savvy underwriter is zero.
The problems of deductible escalation, lasers, coverage gaps, or quote declinations hit mid-size employers especially hard. (Larger employers do well with higher deductibles and thin coverage, if indeed they need any coverage at all.)
The result of all this is to place a double whammy on the hapless small to mid-sized self-funded employer who not only faces the prospect of accepting normal insurance fluctuation risk, but also the uncertainty of failed insurance when they need it most.
Who’s to blame here? Actually, it’s the buyer, if anyone. Employers and their brokers simply buy the cheapest price without any regard for understanding and managing risk or considering the global picture. It’s the stop loss carriers who have no choice but to meet market demand and assemble the team of claim avoidance experts in order to deliver the cheap price the employers demand to see on the spread sheet of pricing options.
None of this is meant to malign underwriting or the insurance carriers. Underwriting is a tough, highly skilled job, and stop loss insurance is an honest business carried out by people who work hard to provide value for the slim premiums the marketplace allows. Nonetheless, the reality is that thin prices and thin coverage create instability and poor risk management dynamics for employers choosing to self-fund and subvert the purpose of the consortium concept.
A Successful Model
Group consortium purchasing presents an opportunity for mid-sized employers to aggregate together, design a new model that eliminates the perils of self-funding, and welcome stop loss carriers as a partner, not an adversary. Replacing the underwriting model with an actuarial model can produce a system that aligns the incentives between buyer and seller and creates safety for each party.
An important observation to make is that underwriters and their team of free safeties generally do not avoid claims, but rather re-direct who pays the claims. They may shove the claim back to the employer who has limited resources to pay the claim. Employers sometimes shove the claim to their administrator if it was their mistake that led to the denial; even worse, to the participant with the least amount of resources who failed to follow the managed care protocols. If the underwriter assesses high rates at renewal to avoid the claim, the employer may flee to the high cost fully insured market but will inevitably pay for the claim through insurance premiums.
All this activity generates a lot of cost but doesn’t really take any money out of the system – it’s just a game of hot potato to see who gets stuck with the claim.
A successful group purchase program has the opportunity to re-write the rules. Employers who come together in a consortium can mutually agree to share the risk of shock claims that are covered by their plan documents using stop loss insurance without the holes. Deductible levels can be set actuarially at an appropriate level (probably lower than the stop loss carriers would prefer) to share risk and suppress fluctuations.
With an agreement to share risk at actuarially determined deductibles, financed through stop loss premium, there is no need for disclosure, lasers, coverage gaps, and punitive renewals since these mechanisms simply re-direct which employer gets stuck with the claim and don’t really save money from the system. The underwriting function is reduced to preventing anti-selection by any employer wanting to join the consortium.
Similarly, on the aggregate side, a cluster of employers can aggregate for the purpose of sharing aggregate risk and place attachment points at a level that actually have some meaning. That is to say, place attachment points that will cap the self-funded aggregate claims each year for some members of the pool that experience the occasional high claim year.
The role of the actuary in the new model is to enhance value for both the buyer and the seller. For the buyer (employer), the actuary must design appropriate risk share mechanisms and attachment points that produce predictability, stability, and fairness across the employers participating in the group purchase. Fairness arises from careful analysis and balancing of the risk each employer presents to the consortium pool.
For the carrier, an accurate estimate of insured risk and adequate pricing, over time, insures that fair but modest profit goals are being met for the carrier.
This system is actually cheaper since it eliminates the overhead and administrative complexity of underwriting, disclosure, claim denials and audits, law suits, constant shopping, and flights in and out of fully insured programs. The overhead costs of the underwriting and claim review juggernaut is thus replaced by actuarial guidance at a lower cost. The claim burden for the system remains the same but is now appropriately spread over a larger base without lasers, denials, rejections, or inappropriately high deductibles. Further savings are achieved from volume discounts for both stop loss coverage and service vendors.
This system is more efficient as it enables employers to create a stable platform that unlocks the savings of self-funding but eliminates the array of hazards that cause some self-funded programs to incur large losses and flee back to full insurance at a high cost.
Employers have to realize cheap stop loss premiums result from high deductibles and thin coverage. The cheaper the stop loss, the more the carrier is compelled to seek ways not to pay claims, that is to say, tough underwriting and claim review. The claims not paid by the carrier are usually paid by the employer, or worse, the participant.
Employers willing to seek a stable sustainable program will acknowledge there are a certain number of claims that will occur as a result of providing employee health coverage. These claims are going to be financed by somebody. They have a choice of traditional stop loss with all the inherent instability and uncertainty, or else they can agree, with their consortium partners, to jointly finance the shock claims across the consortium with fairness, spread of risk, and year-to-year stability. Having agreed to finance these claims in a different fashion, the final step is to find a carrier partner with sufficient capital to provide a bigger pool of money to absorb shocks and take the transfer of risk at a fair price.
Richard Burd, FSA, MAAA Executive Vice President The Benecon Group Leola, PA
Mr. Burd is a practicing actuary specializing in designing group medical risk share mechanisms and placing stop loss coverage for consortiums of employers, both public and private. Benecon manages ten group purchase consortiums across two states covering about 20,000 employees.
Richard H. Burd, FSA, MAAA The Benecon Group Executive Vice President – Actuarial Division
Mr. Burd has over 30 years of actuarial experience working with group medical plans and other employee benefit programs. Prior to joining The Benecon Group in 2001, he was Vice President and Corporate Actuary for Educators Mutual Life Insurance Company in Lancaster, Pennsylvania.
Mr. Burd’s expertise is in the area of group insurance programs, both fully insured and self funded, including pricing models, underwriting, trend analysis, claim modeling and projections, demographics, and credibility and statistical concepts. He is a Fellow of the Society of Actuaries (FSA) and a Member of the American Academy of Actuaries (MAAA).
The Benecon Group specializes in managing municipal purchasing cooperatives and private sector cooperative for an array of industries. Risk management strategies are designed and structured by the staff of the Actuarial Division. Benecon currently manages ten separate purchasing co-ops representing about 200 employers and over 20,000 employees in two states