The medical stop loss insurance market has experienced a surge in recent years as more employers in the United States attempt to save costs by offering self-funded health benefit programs and using medical stop loss insurance as a financial backstop.
Employers who self-insure can use medical stop loss insurance in one of two ways. They can either use it to hedge against a single catastrophic claim, for example an employee with a rare cancer who needs a new very expensive cancer drug, or they can use it to cover aggregate loss above and beyond the expected cost of their plan demographic. Success in the self-insurance arena requires strong partnerships between the employers, the plan administrators, and the insurance brokers and stop loss carriers. Brokers play a pivotal role in fostering long term relationships between these parties.
“The broker has to be knowledgeable and have a good understanding of the medical stop loss market,” explained Theresa Galizia (pictured), chief underwriting officer, Ironshore Medical Stop Loss. “It’s also important for the broker to be able to demonstrate the value of a long-term partnership. Too often, we see brokers market stop loss placements year after year. But if you think about the way medical stop loss insurance is designed to work, it’s really more of a smoothing mechanism. A client might have a catastrophic claim in the first year of its relationship with a stop loss carrier, but that doesn’t necessarily mean the stop loss carrier is going to triple its rate upon renewal. The goal is to price the program for long term sustainability.”
Stop loss carriers address adverse loss development on cases through medical underwriting. Rather than penalizing the entire group with high overall premiums or more conservative structures, stop loss underwriters can introduce lasers, where they exclude (or “laser out”) a certain claimant (someone deemed too high risk) from a policy, or they cover that claimant but at a higher deductible than the rest of the plan participants. While lasers offer an opportunity to address targeted, ongoing medical liability, they do potentially create a gap in coverage for the self-funded employer who has a high-risk claimant in its population. This creates an added financial burden to the self-funded employer.
However, in the last five years, medical stop loss carriers have started offering what’s known as a ‘No New Laser’ (NNL) contract in order to reassure self-funded groups that they will maintain protection, at least for the next foreseeable renewal cycle. Under an NNL contract, the carrier agrees not to impose any further exclusions or lasers to the policy (other than those imposed at inception of the contract). Further, the NNL provision is typically accompanied by a rate cap, where underwriters agree upfront not to increase first year renewal premium by more than a pre-determined percentage. The percentage varies, but on average is within 35% to 50%.
“However, over the last 12 to 18 months, medical stop loss carriers started feeling the burn from that strategy,” Galizia commented. “Carriers are tightening underwriting controls with respect to those types of coverage enhancements and being a little bit more diligent and careful around when they offer those types of provisions. For example, we’ve instituted minimum premium and minimum attachment point requirements. We also make sure that the benefit is properly accounted for in our pricing models.
“There was a misconception in the market that NNL contracts would be evergreen provisions, when the language really didn’t support an evergreen provision. In actuality, the language really only creates a one-year commitment (at renewal). It said we would only take up to a certain amount of rate action and/or not impose any new lasers at the first renewal. Clearly demonstrating that and making the true intention of the language known to brokers and clients is essential. To the extent that we renew the policy, we don’t need to continue offering those provisions if we’re not comfortable doing so.”
With respect to new and emerging exposures that can carry a very high price tag, such as cell and gene therapies, stop loss carriers typically allow these expenses as eligible under the stop loss policy, provided the services meet the plan’s definition of medical necessity. It’s currently abnormal for a medical stop loss carrier to include a blanket exclusion on a policy for these types of services, explained Galizia. One of the main reasons why self-funded employers buy medical stop loss insurance in the first place is to secure a financial backstop for unexpected claims with severe cost, such as a sick employee that needs a new gene therapy or a new cancer drug that could cost $1 million or more.
“We’re not yet in a position where we would introduce blanket exclusions for some of these expensive new therapies and drugs,” Galizia commented. “For example, the expected frequency of a claim involving a brand-new gene therapy is very low, at least at this time. If that were to change and it became the new normal to expect a high frequency of gene therapy claims, then that’s going to shift the way that clients and brokers structure programs. Deductibles will have to be a lot higher, carriers may introduce terms that include a retrospective-rate provision, or maybe a tiered funding mechanism where clients share in more of the risk at certain thresholds. All of these things are yet to be seen.”