Going through charges
In March, the US House of Representatives, by an overwhelming majority, passed the Self-Insurance Protection Act. Although the act does not materially alter the regulatory status quo, it does provide a path to legislation that will eventually affirm and preserve an employer’s ability to self-fund employee benefit healthcare insurance.

Self-funding of employee healthcare coverage has been one of the insurance industry’s fastest growing segments over the past several years. The accelerated interest, largely attributable to the Affordable Care Act (ACA) and subsequent reform-related insecurity, has also induced the expanded use of captives for medical stop-loss and a commensurate expansion in the demand for medical stop-loss itself.

Continued legislative uncertainty surrounding the ACA reform has fuelled a revolution of evolution in self-funding and the medical stop-loss market; changing the dynamics of both.

Evolution: Regulatory anxiety drives expansion

The current executive administration’s attempts to transform its predecessor’s reforms continue to increase regulatory anxiety and drive further expansion of the self-funded market where employers can increase their level of control and certainty over regulation and stabilise costs. Legislators have been myopically focused on regulating insurance rather than appropriately addressing the root cause of rising costs. In healthcare terms, this is essentially, the regulatory equivalent of suppressing symptoms rather than working to actually cure the illness.

The cost of insurance directly reflects charges for healthcare; which, for this discussion, is defined the charges for all procedurals and pharmaceuticals by providers. Reform attempts will be successful only if they are based on addressing the charges for healthcare, itself rather than the cost of insurance.

Healthcare cost versus billed charges

All hospitals maintain a ‘chargemaster’, which is a hospital’s comprehensive listing of all procedural charges and serves as the starting point for the ‘billing charges’ that are assessed to the general public for treatment. There is virtually no regulation of chargemasters, which leaves providers with a nearly unbridled flexibility to define prices.

A recent study found that the average hospital had an overall charge-to-cost markup ratio of 4.32, meaning, the average hospital set a chargemaster price of $4.32 against a Medicare-allowable procedure cost of $1. Some specialty procedures had charge-to-cost markup ratios approaching 28.5. In order to maximise revenue, US hospitals typically mark up prices more than 20-fold knowing that they are likely to receive much less from commercial insurers based on negotiated discounts.

The charges within the same facility can be completely different depending on the network agreement with each insurance carrier. To put this in perspective, different people with the same medical condition, that go to the same doctor in the same hospital, are likely to be assessed and charged completely differently for the exact same treatment simply because they have different medical insurance cards. The actual cost of healthcare is largely irrelevant, as the insurance carrier will only respond to the pre-negotiated charge with the provider.

The solution for containing cost through healthcare reform needs to be based on developing a systemically consistent, referenced–based, approach to the pricing of charges from providers for all procedurals. The reference point for all charges needs to be based on a consistent base standard nationally. Using Medicare with a realistic margin, for example, Medicare plus 50 to 60 percent+, and appropriate geographic cost-of-business adjustments would be a logical charge basis. The reimbursement formula should also acknowledge the qualitative patient outcome performance of the provider. This will help contain costs while still fostering qualitative-based competition—both of which will serve to mitigate the cost of insurance. It would effectively put every segment of the healthcare chain on an equal playing field. Providers would have the ability to receive an appropriately consistent profit margin while competing via operating efficiency and qualitative effectiveness.

This referenced-based approach has been adopted by an increasing number of self-insured health plans, which are currently the only healthcare payers that can feasibly employ the plan design structure.

Achieving certainty in an uncertain environment

While there is no reform solution on the horizon for systemically justifying the inconsistent basis for healthcare charges, the approach for many employers has centered on attaining the ability to assume control of what they actually can. This is the primary reason behind the tremendous growth in both pure self-funding and medical stop-loss captives over the past several years.

Self-funding has long proven to be the most efficient form of healthcare financing and is the only way to effectively assuage insurance-related legislative anxiety by providing stabilising certainty within an unstable regulatory environment. A self-insured plan has the unique ability to supersede most benefit mandates promulgated by state insurance regulations that would be applicable to a fully insured benefit plan. The ability to preempt state insurance and benefit mandates provides a self-insuring employer with an enormous amount of flexibility to tailor a benefit plan design that best fits the needs of its specific employee population.

Self-insured employers can also adopt a more advanced cost containment initiatives that are not typically pursued or otherwise available within more conventionally regulated insurance arrangements. This includes, as outlined earlier, implementing a pre-negotiated referenced-based pricing approach to more definitively define provider charges.

Revolution in medical stop-loss market

The evolutionary expansion within the self-funded market has led to a correspondingly significant revolution in the medical stop-loss market. The stop-loss market is estimated to have grown to a $14 to $15 billion market, up from $8 to $10 billion (prior to the ACA) in 2010. It is further estimated that the top 10 medical stop-loss carriers now control nearly 70 percent of that $15 billion market, whereas, in 2010, the 70 percent market share is estimated to have been spread among the 25 carriers.

The following examples illustrate the rapidly evolving dynamics of the medical stop-loss market over the past year alone:

  • In 2015 and 2016, three major writers of stop-loss were purchased by larger carriers

  • In early 2016, one of the world’s largest insurance organisations entered the stop-loss market under the direction of a group of senior executives formerly with another large direct-writing carrier

  • In January 2017, a major managing general underwriter (MGU)-based stop-loss writer signalled its intent to establish a direct-writing platform, making this the fifth major medical stop-loss carrier since 2010 to do the same

  • In February, a specialty carrier exited the mainstream stop-loss market and will only write stop-loss in partnership with select community health plans

  • At least two significant direct-writing carriers currently outsource their stop-loss underwriting to MGUs and, in March, a third major stop-loss carrier announced its immediate intention to do the same—the distinction should be made that this is only for backroom underwriting services rather than a comprehensive MGU relationship

  • Also in March, one of the industry’s largest multi-line carriers announced the purchase of a mid-size MGU to enter the medical stop-loss business

  • In April, one of the largest life and disability insurers announced an intention to begin writing medical stop-loss for a 1 January 2018 effective date


  • This is only the tip of the proverbial iceberg for expected market changes in 2017. Much of the expected evolution will come from increased volatility within the MGU market in response to the larger market dynamics mentioned above.

    Several new MGUs have been formed and several more will be either acquired, abolished or are seeking new issuing carrier relationships.

    Market expansion by way of contraction

    If interest in self-funding and the need for medical stop-loss has grown so significantly, why has the number of stop-loss carriers contracted so significantly?

    The number of carriers has not really contracted but rather this is a definitive trend of large carriers acquiring more market share to enhance their ability to efficiently compete within what is a highly competitive market. As discussed earlier, the failure of reform proposals to appropriately address how the cost of healthcare is charged to health plans, the cost of claims, especially large claims, will continue to increase.

    The frequency of large claims penetrating the specific stop-loss deductibles of self-funded programmes has risen to unsettling levels for both plan sponsors and underwriters. The market continuously pushes for aggressive pricing and contract terms, while costs within an uncertain regulatory environment push in an incompatible direction. Medical stop-loss is a line of business that increasingly needs to be written by carriers having the financial strength and stop-loss portfolio large enough to absorb losses.

    Having the ability to stabilise regulatory and fiscal certainty through self-funding will continue drive expansion of the self-insured and medical stop-loss captive markets. Continued growth will be especially strong from employers having less than 500 lives and with group captives catering to smaller and mid-sized employers.
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