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MCOs Focus More Resources on Stop Loss

Managed Care Week
June 18, 2007

MCOs Focus More Resources on Stop Loss, As Congress Considers State-Run Pools

As the number of customers using self-funding grows, health insurers and TPAs increasingly are underwriting or selling private stop-loss coverage to employers. WellPoint, Inc., for example, is adding new features to its reinsurance offerings for employers and is standardizing offerings across the company. Proposals circulating on Capitol Hill could change the reinsurance market, however, by creating or strengthening reinsurance pools in an effort to make insurance more affordable for employers. Some MCOs oppose broader use of government-operated reinsurance pools, contending that employers are best off purchasing reinsurance from their medical insurance carrier.

When an employer chooses to self-insure medical benefits, it essentially acts as the insurance company for its employees, paying for most health expenses that workers and dependents might incur. If the claims cost is lower than was expected, the company might save money by self-funding, since it can pocket the difference between expected and actual medical costs. But if claims are significantly higher than expected, the employer could lose a bundle.

For that reason, all but the very largest employers - those with more than 10,000 workers - purchase reinsurance coverage, paying another carrier to take the risk for unusually large claims for conditions like organ transplants, severe burns or neonatal intensive care.

Companies generally choose one of two types of reinsurance, says Ann Marie Wood, regional vice president for underwriting at Anthem. They are:

(1) Aggregate stop loss, which covers all members and includes both medical and prescription drug claims. Employers agree to cover expected medical costs, but may purchase reinsurance to pay for claims above that amount - typically those above 110% to 150% of expected costs, Wood says. "The customer determines how much risk they're willing to take, and fees are respectively high and low based on that," she explains.

(2) Individual or per-participant stop loss, which protects the employer from catastrophic claims filed by a single enrollee. Anthem sells coverage starting at $50,000, Wood says. The employer would be responsible for single claims up to that amount, and Anthem would cover claims over that amount. Larger groups with more than 500 workers might purchase coverage starting at $150,000 to $200,000, she says. As a rule of thumb, employers limit per-participant stop-loss coverage to 1% to 5% of projected claims for the following year. Wood says reinsurance premiums are rising at a faster rate than the medical cost trend. Reinsurance premiums are increasing about 10% to 12% this year, says Dave Parker, senior vice president of sales at Meritain Health, an Amherst, N.Y.-based TPA.

State, Federal Pools Are Under Consideration

The House Committee on Small Business held a hearing May 24 to consider ways to use reinsurance to make insurance coverage more affordable for small businesses. Kate Gilman, committee spokesperson, says the hearing didn't focus on a specific proposal. Instead, those testifying discussed options such as strengthening state reinsurance pools or adding federal subsidies for reinsurance costs.

Sen. John Kerry (D-Mass.) last month proposed the Healthy Businesses, Healthy Workers Reinsurance Act of 2007 (S. 1298), which would establish a reinsurance trust fund administered by HHS. "The fund would reimburse qualified employers and health plans for a portion of the catastrophic health costs of their active and retired employees, and their families," Kerry said.

Wood contends that employers are better off purchasing reinsurance from the same carrier that provides health insurance for workers. "I'm a strong believer in carriers underwriting [reinsurance] for groups, rather than going to a third party," says Wood.

She notes that some states, particularly in the Northeast, have prominent reinsurance pools. "There are pros and cons to anything like that. A benefit may be that may be more of the small businesses could have insurance," she says. But, she contends, "when the reinsurer also pays and manages claims, there's more alignment because they try to manage to the best treatment and best outcomes."

Anthem sells reinsurance coverage to self-funded employers with 100 or more workers. Premiums for stop-loss coverage vary by employer, but typically are lower for customers that have HMO medical coverage, since "their program may be a little more managed."

Wood is leading an enterprise-wide group charged with helping WellPoint plans in 14 states improve and standardize their stop-loss offerings. One reinsurance plan design sold by the Anthem Virginia plan - and that Wood's group recommended that other Anthem plans adopt - is the so-called 15/12 product. It provides additional coverage to employers for claims incurred before the policy year starts. Anthem includes claims incurred in the three months prior to the contract start in its calculation of total medical costs incurred by the employer. "It provides the customer a little protection on their [claims] runout," Wood says. Anthem offers a similar 18/12 product that covers the six months prior to the contract start date.

"Some of the pools that have been proposed are actually employer pools where employers can pool both claims and premiums [for reinsurance]," says Bill Breidenback, president of Health Plans, Inc., the TPA subsidiary of Harvard Pilgrim Health Care, Inc.

He cites Maine as an example of a state that has an active reinsurance pool, but adds that it doesn't apply to self-funded employers.

Breidenback says it's difficult to say how the reinsurance market would be affected by greater use of pools. But, he adds, a government-subsidized reinsurance pool ultimately is "just a mechanism for the state subsidizing certain segments of the population," he says, since the states would cover employers' medical costs above a certain level. The medical costs still would be incurred, but responsibility for paying them would shift from the employer to the government.

Health Plans links self-funded employers with stoploss coverage sold by third-party carriers, he says. The firm provides claims-processing coordination, premium accounting, billing and other functions. Health Plans' clients typically are employers with 100 or more workers, although there are a few with 70 to 80 employees. The average customer has 325 workers, he says.

Relatively Few MCOs Are in Stop-Loss Business

Several large health insurers sell reinsurance to self-funded employer customers, including Aetna, Inc., WellPoint, Highmark Inc., CIGNA Corp. and UnitedHealth Group. But "there are not a lot of true health insurers that provide reinsurance that we can access as an independent benefits administrator," Parker says. United and Aetna are among those selling reinsurance via TPAs. "I would speculate that the reason more health insurers do not allow their reinsurance coverage to be used by TPAs is purely competition," he adds.

"For the most part, the biggest majority of reinsurance that TPAs access is via private reinsurance/insurance companies or managing general underwriters," he says. Kennesaw, Ga.-based HCC Life Insurance Co., a unit of HCC Insurance Holdings, Inc., is the biggest player "by a pretty wide margin," Parker adds.

Other major health reinsurers include The Chubb Corp., Munich Re and Swiss Re.

In the health insurance business, MCOs add new features, services or incentives each year. But it's less common for reinsurance carriers to add new bells and whistles to stop-loss coverage, Parker says.

"Reinsurance is a more difficult program to modify based on, say, the market trends," he says. "That's primarily because it's dealing with a large catastrophic loss," either incurred by an individual or by the group as a whole. As a result, "it's not as heavily impacted by a minor deductible change," for example. What does affect employers' experience are the "overall decisions the group makes, such as moving enrollees into a consumer-directed health plan or using more aggressive medical management."


Contact: Kerry O'Neill, 410.902.5035

View the entire issue: Managed Care Week, Volume 17, Number 22