A Did You Know (DYK) on Specific Stop-Loss (SSL)
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Insurance and acronyms are like peanut butter and jelly. Or should I say PB&J?
Let me phrase this a different way…a Did You Know on Specific Stop-Loss. Not the most exciting blog title; however, if your medical plan is self-insured you may want to take a few minutes to read on!
Most employers, when self-insuring their medical plans, are actually partially self-insured. They will purchase specific stop-loss (SSL) to cap their liability on a per-member claim basis. This is a critical component of minimizing the risk of your health plan, protecting you from the volatility and increasing incident rate of catastrophic losses on a per-covered person basis. Understanding all components and protective measures of your SSL policy could be the difference between self-insuring working in alignment with your overall budget and strategy or not.
If you’re a self-insured employer today, below are two common facts about SSL that are often overlooked or misunderstood:
Did you know…
- Specific stop-loss is a pooled product, and not experience-rated. In other words, your SSL renewal will not be based on your company’s premium paid versus the reinsurance company’s paid stop-loss claims. Instead, your renewal is based on the experience of the entire reinsurance pool you are in, with adjustments from that point made by the underwriter for demographic changes and known prospective, ongoing large claimants. But not retrospective claim gains or losses on an individual employer basis.
The reason for this is in the difficulty of knowing with any degree of accuracy how many, and how severe, individual large claimants will be in the future. That crystal ball doesn’t exist. The good news for you is that pooling mitigates the potential for massive swings in SSL renewals year-after-year despite the volatility and lack of predictability of this risk.
Strategy: Despite SSL not being experience-rated, that doesn’t mean you can’t use positive historical specific stop-loss experience to your advantage when negotiating your renewal or new business pricing in the marketplace. Tally premium vs claims annually and in total. Go back historically as far as possible and update this calculation each year. If the insurance company has realized gains historically, you’ll know exactly how much. Be sure to inform the renewal or new business underwriter and use it to your advantage.
- Leveraged trend on specific stop-loss is a real thing! If you don’t increase your SSL deductible at renewal (keeping your liability the same) at a rate requisite to the annual medical/prescription trend, there’s a leveraging effect on large claims that increases the insurer’s liability at more than double the annual medical/prescription trend factor. This means that starting point for SSL renewals at the same deductible level is typically 18-25%.
Strategy: To offset the leveraging effect of specific stop-loss, consider raising your SSL deductible at renewal time. If annual medical/prescription trend is 8%, then increasing your specific stop-loss deductible by the same 8% completely mitigates the leveraging effect on stop-loss. Analyze a simple break-even report to understand the dollar savings in premium against the increased deductible liability to determine how many claimants reaching the increased deductible level results in you winning, or losing. Note this doesn’t mean you raise your deductible every year, but you should at least consider doing so. Most often, raising the deductible is a strategy implemented during years that the SSL renewal premium increase is excessive.
Bottom line, SSL is a critical coverage for the self-insured employer to minimize catastrophic risk. Other SSL pricing strategies can include purchasing an aggregating specific deductible, requesting a laser (if structured correctly, could be a great out of the box strategy), or pooling risk into a captive arrangement.
If you’re self-insured, or are considering making the move, make sure you’re working with a consultant that knows the intricacies of SSL, as there are many! For more information and to see if a partially self-funded health insurance plan might be right for your organization, contact the ‘A’ Team!
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