The latest Vermont Captive Insurance Association (VCIA) webinar, entitled Placing Medical Stop-Loss Coverage in your Captive, brought together some of Vermont’s experts to discuss an issue that has become increasingly prominent in today’s captive insurance landscape in the US.
The latest Vermont Captive Insurance Association (VCIA) webinar, entitled Placing Medical Stop-Loss Coverage in your Captive, brought together some of Vermont’s experts to discuss an issue that has become increasingly prominent in today’s captive insurance landscape in the US.
The panel, moderated by Derick White of Strategic Risk Solutions in Vermont, included David Provost, deputy commissioner of captive insurance at the Vermont Department of Financial Regulation; Tris Felix, vice president for risk management at IMA; Ellen Eldridge, manager of health benefits services for Adventist Risk Management; and Laura Zehm, CFO at the Community Hospital of the Monterey Peninsula.
Provost said that medical stop-loss insurance, which protects against catastrophic or unpredictable losses and is purchased by the employer for the employee, is considered to be a form of third-party business in Vermont.
“We consider it third party business in a captive like most other employee benefits … like other types of reinsurance, if the stop-loss insurer can’t pay; the insured, that is the employer, is still on the hook.”
To clarify coverage terms, Provost defined the difference between specific and aggregate excess. He explained that specific (individual) excess provides coverage for large dollar claims of an individual, addressing severity concerns. Aggregate excess on the other hand provides protection for an accumulation of claims and protects against greater than expected claim frequency.
According to Provost, a typical captive stop-loss structure would consist of an employer providing healthcare benefits to employees through a self-insured plan, with both the employer and the employees paying into the plan via a trust.
Provost went on to outline the Employee Retirement Income Security Act (ERISA) of 1974, which he described as “a federal law that has had a major impact on the current environment of medical stop-loss coverage”.
“As its name implies, it focuses on retirement plans but it also impacted healthcare benefits. A very key issue of ERISA is that it pre-empts certain state laws relating to employer-sponsored employee health plans, particularly when the employer self insures or self funds the plan.”
Provost added that if an employer opts for self insurance, it would become exempt from many state laws relating to healthcare coverage. However, states can still regulate insurance carriers if an employer purchases insurance through them.
Clamping down
While rules have clearly been put in place to define a legitimate captive stop-loss structure, Provost explained that “regulators at many levels have concerns”.
Regulatory worries include cash flow, adverse selection, small employers’ resources, avoidance of state-mandated health benefits, and lasering—the practice of carving out expensive employees from the excess coverage, leaving the employer responsible.
The question of whether the policy is actually classed as stop-loss is top of regulators’ lists. “If the attachment points are so low that it’s not really beyond what is normal then it really is acting like insurance,” said Provost.
“I’ve read in some extreme cases that the attachment point attaches at one dollar and that clearly isn’t stop-loss coverage. So at some points it’s not stop-loss, it is primary cover and therefore should be subject to insurance regulations.”
To regulate medical stop-loss, the National Association of Insurance Commissioners (NAIC) developed a Stop-Loss Insurance Model Act in 1995 for its state regulator members. It was later amended in 1999.
The main provisions of the act include: preventing insurers from gaming the system by selling at very low attachment points; making self-insured plans retain significant risk; and establishing minimum attachment points.
Safety in numbers
Building on Provost’s outline, Felix explained how the industry has arrived at this point in terms of medical stop-loss and the use of captive insurance companies.
Felix highlighted that over a 10-year period between 1999 and 2009, workers’ contributions to family coverage rose by 128 percent. This is a percentage increase that Felix felt “is way above collateral protection insurance and inflation wages, so it’s not sustainable”.
“This is why employers—particularly smaller and middle-market employers—are looking, desperately in some cases, for solutions and strategies to get costs under control.”
“What is driving the interest for employers around the country is that you have a large expansion of health insurance coverage, but from the employers’ perspective, very little has been done to control costs, the quality of care provided to their employees, or the dependence on the plans.”
He added: “So we’re seeing even more of a dramatic increase in interest from employers around the country in these types of strategies … The predominant trend we’re seeing is fronted group captive programmes for the stop-loss piece.”
According to Felix, for a group programme to work, each plan sponsor must adopt its own self-funded plan. Each of the plan sponsors must then acquire a medical stop-loss policy before finally participating in a captive insurance company to facilitate the acquisition of the stop-loss insurance.
Once in place, a group captive will then share the risk of loss for large claims that no single member could afford on its own, and also leverage group economies of scale to purchase higher levels of stop-loss insurance.
Felix added that a group captive can facilitate self funding by funding the layers in between the employer claim fund/self-insured retention and the stop-loss insurance excess.
“In that group captive where you’ve built up some scale, say 2000, 3000 or more employees. Claimers between 25,000 and 250,000 become a lot more predictable and capable of being self-funded in a way that no single employer could do on its own. And so the captive is the funding mechanism that allows smaller employers to self-fund. That is the key to these programmes.”
Finally, from an employer’s perspective, Felix explained the cash flow benefits of the scheme. Essentially, what employers don’t spend, they keep.
He also highlighted the ongoing cash reduction associated with a self funded programme and the control that employer’s hold over medical administration, transparency and costs.
Looking to the future for regulation of stop-loss in the US, Provost said that only three states, including Vermont, have currently adopted the Stop-Loss Insurance Model Act. Thirty-seven states have taken no action at all and 16 states have taken some form of related activity, but they have so far not adopted the model in a uniform and substantially similar manner.
But for Provost the “primary concern is being careful with small employer groups getting involved in captives and stop-loss and perhaps getting in a little over their heads.”
