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Answers to Request for Information about Stop-Loss

Requested by IRS, Department of Labor EBSA, HHS CMS

 

 

May 1, 2012

Submitted by the Society of Professional Benefit Administrators (SPBA)

SPBA is the national association of Third Party Administrators (TPAs) who are hired by benefit plans & employer sponsors and delegated to provide day-to-day administration on behalf of the plan officials.  SPBA also has leading Stop-Loss Service Partners.  The role of TPAs is much like that of law firms & tax preparation firms…..outside independent arm’s-length professional services.

These answers were submitted and designed as a layman background, context and explanation to provide the “big picture” and assist the government in understanding what may be more technical responses from others.  We will submit additional information as needed, and we welcome any questions or clarifications you may have at any time in this process.  Contact:  Fred@spbatpa.org or Anne@spbatpa.org or phone Fred Hunt or Anne Lennan at (301) 718-SPBA.

BACKGROUND & OVERVIEW:  The questions seem to be imagining too much in the role of Stop-Loss and especially attachment points.  So, that needs to be addressed first.

Stop-Loss is one of the few terms that mean what it says.  It is a back-up, a parachute.  It stops unexpected loss; period.  There is nothing mysterious.  We all buy some form of coverage such as car insurance or home insurance to protect us from unexpected (unbudgeted) losses.  The deductible (attachment points) we chose for our car, home, or liability is a reflection of our budget and comfort with risk.  So, a person with a fleet of limousines may choose a $100 deductible policy….and a person with a clunker may choose a $2,500 deductible.  The choice of attachment point has no relevance to the financial stability, driving skill, location, or anything else.  It is a budget decision. 

The fleet of limousines example also exemplifies an important choice factor for employers & plans.  The person with one car can absorb his single $2,500 choice.  The person with several cars (or many employees in the case of an employer or plan choosing a Stop-Loss attachment point) has to be prepared if several of his cars (or employees) are in accidents.  So, in the case of Stop-Loss, an employer may seem to have a low individual attachment point………but if you magnify that risk by how many employees & dependents are on the plan, the total risk is gigantic, so the “low” attachment point would be to protect from that multiple effect.

As we will mention or refer in answer to several of the questions, tighter budgets & operating ratios of employers and runaway medical costs….and frequent scary headlines about impending widespread epidemics,  vast increase in diabetes and massive growth in dementia and other conditions & costs, have made employers & plans (state & local government entities, collectively-bargained plans, and corporations) much more cautious and attentive to avoiding large unforeseen hits to the bottom lineThat is the underlying answer to many of your questions.

At SPBA, we take ERISA and its fiduciary duty seriously.  SPBA’s insights go back to the writing of the law, so we realize that it was purposely designed to be the ultimate consumer protection law, and that it still achieves that goal (and is the best measure and enforcer for self-funding and related issues).  Even self-funded plans that do not fall under ERISA (state/local government employee plans + religious entity employers) tend to be administered by our SPBA TPA members in the spirit of ERISA fiduciary duty.  Consequently, the Department of Labor EBSA and those of us who honor ERISA should be cheering that employers are being attentive to protect their cash-flow with Stop-Loss so that plan participants receive their promised benefits.  Any trends downward (more protection) are a success story for fiduciary duty.

So, as we will answer in several of your questions, the issue of the level of Stop-Loss attachment point is irrelevant and more apt to be a distorting indicator for the insight you are seeking.

When we began in self-funding employee benefits in 1974, the rule-of-thumb minimum “safe” size for self-funding (there was no Stop-Loss at the time) was 5,000 lives.  That quickly dropped to 2,500, then 1,000, then 500, then 100, and self-funding with well-designed Stop-Loss is proving to work well for employers below 100.  Is there some minimum?  Heck, in 1974 we would have said it was 5,000.  Think how silly that would sound now!  However, the key is not some magical number of lives or attachment pointsThe true judgment is whether the plan meets ERISA requirements (or similar common sense for state/local government employers & religious organization employers).  For example, here in Washington DC, we all know of hundreds of law firms, consultants, contractors, etc. who fall into the very small-employer size category, but their cash flow and financial stability are far better than many huge corporations & government entities.

Judging what is “fake” or “sham” self-funding is like Supreme Court Justice Brennan’s description of pornography, “I can’t describe it, but I know when I see it.”  Fortunately, unlike pornography, self-funding has an excellent written measure…ERISA and its duties.  Fake & sham programs of any size fail to meet the parameters of ERISA, and DOL has been pursuing such sham or rogue plans for decades.  We suggest that DOL Enforcement be encouraged & enhanced for situations that seem questionable.  To have state or federal governments setting arbitrary limits or tests for what is a statutory fiduciary decision of the plan sponsors (planning for prudent cash flow for funding promised benefits) is inappropriate and would lead to problems later.  (It is as inappropriate as if the state or federal government dictated some arbitrary amount as the minimum or maximum deductible amount in a fully-insured plan.)

States sometimes tell of plans claiming to be self-funded, which have very low aggregate or individual attachment points.  These stories seem to be mostly urban myth, but we know that some insurers & agents get creative and fuzz the line between insured & self-funded.  As noted before, there is a long-established test.  Is the plan meeting all of the ERISA requirements of fiduciary, reporting, etc.?  If not, throw the book at them.  Problem solved.

In answer to the claim of many low Stop-Loss aggregate attachment points in self-funding, in a meeting with a top HHS & CCIIO officials the small individual attachment points concern was expressed.  During the meeting, about 125 TPAs & Stop-Loss providers for plans with probably close to 50% of US covered lives were polled:

“How many of you (S-L) would sell a policy with less than $5,000 attachment point?”  (Zero hands went up.)  “How many $10,000 or below?  (Zero hands.)  “$15,000?” (Zero hands)  “$20,000?” (A few hands with the verbal comment in special cases such as state/local governments and others who are on very strict budgets.)  TPAs were asked if the poll reflected what they were seeing in the marketplace. The TPAs said they were not seeing the very low attachment points perpetrators in the marketplaces where they operate every day.  So, the concern about low Stop-Loss attachment points being rampant seems to be an urban myth, and if there are problems, the Department of Labor EBSA has longstanding rules & process to investigate & act.

Amusingly, if the misguided theory that level of dollar risk (such as lower Stop-Loss attachment points) is “proof” that a plan is not self-funding…….. then what about the mirror image of the vast expansion of high-deductible insured plans which mean that the insurance company is taking less of the risk?  Does that mean that high deductible plans are “self-funded”?  Of course not!  In both cases, it is the underlying structure and compliance with the applicable laws (ERISA or the States) which determines what is self-funded and what is not.  The solutions to confusion have been available for decades.

Important:  Huge legal difference from a regulatory perspective.  The legal status of Stop-Loss has two very different forms.  Sometimes, the Stop-Loss coverage is purchased with plan assets and the reimbursements will come to the plan itself.  In that instance, Stop-Loss is obviously a plan asset and covered by ERISA.  However, the majority of Stop-Loss today is purchased by the employer’s assets, and reimbursements would be paid to the employer.  So, the first question is who is the “owner” of the Stop-Loss policy.

If the Stop-Loss is owned by the employer, then its legal status is the same as the liability, fire or any other insurance the employer buys for the firm.  The employer takes 100% of the cost/risk of the plan.  ERISA assumes that plan sponsors are the official “Administrators” (not to be confused with hired contract TPA “administrators”) and are responsible for all plan responsibilities, period. So, for the majority of Stop-Loss which is employer-owned, it just another kind of insurance an employer buys to protect the cash-flow of his business, and not an issue for States or federal government to regulate….unless fire and liability and other kinds of insurance which might provide some protections to an employer’s operations is also to be regulated as employee benefits.

This extended background introduction is to ease your reading of the answers to the specific questions in the request.  Many of the answers will refer to the explanation & context given above.  Please re-read it after reading the answers to the questions.  It will give context & clarity.

1.  Extent of use of Stop-Loss?  Because health care has become such a huge runaway expense ($1 million single-episode bills are becoming more common), prudence on the part of the plan trustees/sponsors says that the plans or employers should protect the ability to absorb those kinds of expenses on one or several plan participants.   So Stop-Loss has become a fiduciary tool.  Some very large plans, such as some collectively-bargained still do not use Stop-Loss, but the wild cost of medical care is increasingly a risk factor for all plans & sponsors.

Statistics in employee benefits, health care, & insurance are notoriously distorted because so many basic vocabulary terms (which are used as measures) have vastly different understandings usages.  For example one “life” may be just the worker or Mom & Dad + 10 children.  SPBA serves on an HHS/DOL committee tackling this issue.  So, avoid statistics & numbers, because they lead to distortion & mis-information results.

Consequently, there is no official headcount of the number of individuals in plans with Stop-Loss.  Based on the first part of this answer, we would guesstimate that the number is most of the population in self-funded plans.  Because of the health cost trends, we believe that the use of Stop-Loss will remain.  ACA’s effect on Stop-Loss use would depend on how health costs react.

2+ 3.  Attachment points:  As noted in the Background/Overview, the urban myths of tiny attachment points is simply not being seen by Stop-Loss & TPAs who are in the marketplace every day.  If there are anomalies, DOL enforcement should follow-up and see if the existing guiding law is being followed.  If not, step in.  Also, as noted, in a poll of about 100 Stop-Loss in a meeting with top HHS & CCIIO officials, they were asked what is the lowest attachment point, not one hand went up until $20,000, and that was only for special situations.  And again, remember that for individual attachment points, what may seem like a “low” amount  (in the plan sponsor’s mind) would be that limit for however many employees may have high costs that year.  So, $20,000 would be $100,000 if five employees had serious medical bills.

So, all of this again shows that levels of attachment points are an irrelevant misleading measurement.  If a county school district has a few thousand plan participants and is self-funded, the extremely tight budget situations these days means that they don’t want any unexpected bulges in their expenditures.  They might choose a closer attachment point (above their expected expenses) to avoid political uproar.  Does that mean that the county school district is not self-funded??  Of course not!  Size of employer and size of attachment point are misleading & irrelevant.  Follow the ERISA law.

4.  Stop-Loss Integration into the plan?  Like everything in self-funding the goal is customization & personalization for what best fits the plan.  Again, fulfilling fiduciary duty is the main guiding goal.  The plan trustees or employer/sponsor decide what is most prudent for their budget (just as people decide what coverage limits to select for their car, or house or life insurance).   So, yes, virtually all self-funded plans view Stop-Loss as an ongoing tool (just as homeowners buy house insurance year after year).

5.  Stop-Loss & Plan Participant %?  This is an irrelevant question because it is not applicable.  The size or percent of medical costs a plan participant incurs is irrelevant to Stop-Loss, and percent would be wild & misleading.  If a person or plan had $1 million of medical claims in a year, then Stop-Loss would have probably reimbursed a very high percent.  If the person or plan did not trigger any Stop-Loss or just a few dollars, then the Stop-Loss percent would be zero or tiny.  Remember, Stop-Loss is a tool for the highly-unpredictable world of medical expenses.

Loss Ratios for Stop-Loss would also vary year to year (and Stop-Loss also has re-insurance issuers have reinsurance for themselves.   Because Stop-Loss is designed as only as a back-up for unexpected costs, if Stop-Loss is not called upon to pay anything, that is good news.  On the other hand, if one or more of those $1 million claims comes in, then Stop-Loss takes a big hit.  There may be anecdotal answers, but loss ratio of Stop-Loss is another irrelevant factor you can dismiss.

6.  Administrative Costs:  Administrative costs in self-funding are charged in many different ways (per head, flat rate, combined, a la carte, etc.) so there will be statistical distortion galore.  The answer to the question is that there is zero or little administrative cost to the employer to have Stop-Loss.  It is considered just part of a TPA’s administrative duties.  So, this is also an irrelevant question, with an answer of typically zero.

7.   Types of Industries or Employers?  Because Stop-Loss is a tool, it is applicable and used by all sizes & types of plans and industries/types of employers.  As noted, some very large collectively-bargained plans still do not feel the need for Stop-Loss, but medical cost inflation is creating a need for virtually all types of employers/plans to seek the peace of mind of Stop-Loss.  Legal reminder:  The majority of Stop-Loss is now “owned” (paid by & payable to) the employer, so in a very strict legal sense, the “plan” has no (direct) Stop-Loss of its own.  If the Stop-Loss insurer should fail or the Stop-Loss policy does not include some type of cost, the employer or plan sponsor is still legally liable to pay the claims.

As noted, size is not a relevant measure.  The key is whether an employer/plan can meet the strict legal requirements of ERISA or applicable fiduciary for non-ERISA plans such as state/county governments or religious entities.  (True example:  There is a once-large plan for retired nuns of an order.  Due to deaths, it is now only 4 nuns.  However, the plan is run beautifully and funded by the assets of the order.  It meets the attributes of being a self-funded plan.)

8.  Who Issues Stop-Loss?  Some insurance carriers sell and specialize in selling Stop-Loss directly to the plan or employer.  Others use Managing General Underwriters (MGUs).    “Size” will be a distortion, because some MGUs can be quite small…but the key is what is the coverage they are representing (quite substantial).  So, “size” is like judging an insurance product by the size of the small agent/broker.  Stop-Loss must meet state insurance laws, so that is the key factor.

9 + 10.   Stop-Loss selectivity of clients?  Stop-Loss is like any other business.  They want stable clients who have a good chance of succeeding (just as a home insurer wants to insure houses not about to fall down).    SPBA surveys our Stop-Loss Service Partners with about 25 questions about what kinds of plans they prefer and other aspects of the firm.  Some don’t do business in some states and some don’t deal in certain kinds of plans, but the major issues are amazingly uniform.

11.  Stop-Loss State Regulation:  Actual Stop-Loss entities can better answer this question.  Our understanding is that they are insurance companies and are licensed or authorized as such.

12.  Availability of Stop-Loss to Small Employers?  As noted, size is irrelevant.  The Stop-Loss company judges whether the employer/plan entity seems like it can fulfill the duties of being a self-funded plan.  Customized Stop-Loss has made self-funding a workable option for more employers, including small (under 100). 

The availability of Stop-Loss and attachment levels is virtually irrelevant to the issue of whether employers offer health coverage or not .  That decision is based on the financial situation of the employer/planIf self-funding & Stop-Loss were offered in situations in which the Stop-Loss entity did not feel it was a good fit, we would end up with the same crisis as when mortgages were given to people who could not really afford it.  This same situation will apply to small (or any size) employers entering State Exchanges without the economic strength to pay the premiums.  So, this is an irrelevant question.

13.  Stop-Loss impact on fully-insured market?  Stop-Loss has stabilized the self-funded market in a time when medical prices have skyrocketed out of control & predictability.  This is identical to the re-insurance that all health insurance companies buy for stability of their finances.  So, Stop-Loss is not a unique factor in the growth of desire of employers & plans for self-funding.

The attraction of self-funding over fully-insured is the ability, under ERISA, to custom-design coverage…to design the benefits offered to the wants & needs of that particular workforce.  It is the most-bang-for-the buck for both employers & workers.  This is important since individuals are contributing a higher percent of the cost of the plan.  In some plans, the menu of benefits is negotiated by labor & management trustees.  In corporate plans, a major reason the employer offers benefits is to attract, please & retain employees.  So, being able to custom-design benefits for the needs/desires of that workforce is a big plus.  So, it is like asking if you would like a custom-fitted suit for your particular needs….or take one off the rack….especially since self-funding does not include the level of heavy overhead & administration costs so common in insurance companies.

Please now re-read the Background/Overview. It will answer, in context & perspective, the issues raised by the questions.  We think that this input will also allow you to discard several questions/issues which are irrelevant or misleading for your end-goal of understanding the role of Stop-Loss and self-funding.  Also, keep in mind the legal factor that plan-owned Stop-Loss and employer/sponsor-owned Stop-Loss have very different legal standing for the purpose of regulation.  We also urge you to view Stop-Loss in the context of what it is.  Stop-Loss is simply a tool; just like the many other types of insurance coverage (umbrella liability policies etc.) people select every day.  There is nothing sinister about the purchase of car insurance, homeowners, liability insurance etc.  There is nothing sinister about Stop-Loss.

At SPBA, we are happy to provide or seek answers or clarification on this or any other input you receive. 

Society of Professional Benefit Administrators

Fred@spbatpa.org & Anne@spbatpa.org

(301) 718-7722

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