Once an employer is comfortable it can handle some exposure to fluctuating claims costs, it may opt to self-insure its group health plan in order to save money in the long run by avoiding paying the profit margin insurance carriers build into the premiums of fully-insured coverage. Some employers will forego some of the expected savings and purchase stop-loss coverage from an insurance carrier to help limit claims cost volatility. Under a stop-loss insurance policy, the insurance carrier will reimburse claims costs that exceed an agreed-upon dollar threshold. The employer is usually the insured on the stop-loss policy, although sometimes the group health plan itself is the insured under the policy instead. There are two primary types of stop-loss coverage: (i) individual; and (ii) aggregate. Stop-loss coverage will always include individual stop-loss and frequently includes aggregate coverage.
(i) Individual stop-loss – Also referred to as specific stop-loss, individual stop-loss coverage limits an employer’s claims cost exposure for a covered individual to a contracted amount during the policy year. The contracted limit may be referred to as a deductible or pooling point under the policy. For example, a policy with an individual stop-loss deductible of $150,000 limits an employer’s claims exposure to a covered individual to $150,000 during a policy year.
(ii) Aggregate stop-loss – Aggregate stop-loss coverage limits an employer’s total claims cost exposure under the plan during the policy year and helps protect the employer from an unexpectedly high volume of claims, particularly if many of the claims are too small to trigger reimbursement under the individual stop-loss protection themselves. Aggregate stop-loss coverage is usually expressed as a percentage of the plan’s expected annual claims cost (e.g., 150 percent) or as a fixed amount (e.g., $5,000,000).
The stop-loss carrier loses money if it reimburses claims that are not covered by the stop-loss policy. Thus, in order for a claim to be covered under a stop-loss policy and eligible for reimbursement, the following must be true:
- The employer is seeking reimbursement for an individual who was an eligible participant in the group health plan at the time the claim was incurred;
- The claim is for a benefit that is covered under the group health plan; and
- The claim was incurred during a period covered by the stop-loss policy.
As described below, there are many instances where an employer may create a situation (unknowingly or otherwise) where the stop-loss carrier could validly deny reimbursement for claims. The stop-loss carrier may grant an exception, but it isn’t obligated to do so leaving the employer exposed to unexpected claims costs.
- Ineligible claim under group health plan – This is probably the simplest of the issues to digest, but it can include situations that surprise employers. Obviously, the stop-loss carrier can deny reimbursement for a benefit or service that is not covered under the group health plan. Most employers with self-insured group health plans will hire a third party administrator (TPA) to provide a network, process claims, and perform other administrative services for the plan. In addition to processing claims, employers frequently contract with the TPA to administer an appeals process. If an employer overrides a TPA’s decision to deny payment for a claim, the stop-loss carrier may have grounds to deny reimbursement and/or count the claim toward the individual’s stop-loss deductible. The most common scenario is probably an employer overriding the TPA’s judgment that a treatment was excluded under the plan as experimental or investigational. These tend to be expensive claims, and getting a reimbursement might involve having to provide sufficient clinical evidence that the treatment should not be considered experimental or investigational (i.e., rebutting the TPA). Similar judgment disputes exist where the employer directly administers all or part of the appeals process as plan administrator.
- Ineligible participant under group health plan – This includes individuals who are not in an eligible class of employees or dependents or who are otherwise ineligible because of certain circumstances. An example might include claims for an employee who doesn’t meet the group health plan’s definition of an eligible full- or part-time employee or claims for an employee’s ex-spouse who is no longer qualified as an eligible dependent but no notification of the divorce was provided to the plan.
- Late enrollment – This is a variation of the ineligible participant issue and is fairly common. In error or as an exception, employers sometimes permit elections after the group health plan’s applicable annual, initial, or special enrollment window has closed. An individual added to group health plan coverage after the applicable window has closed is generally referred to as a “late enrollee.” Even if the group health plan permits late enrollees (subject to certain limitations or exclusions), the stop-loss carrier may have the right to exclude coverage for the late enrollee under the stop-loss policy without the stop-loss carrier’s prior approval.
- “Special” leaves of absence – This is another common variation of the ineligible participant issue and involves an employer permitting an individual to continue non-COBRA participation in the group health plan while on some sort of leave of absence that is not provided for under the plan. For example, an employer might permit an employee to remain covered under the plan on a “personal leave” after all available paid and/or unpaid leave under the plan (e.g., FMLA, disability, etc.) has ended without transitioning to COBRA.
- Missed acquisition – This occurs when an employer acquires another company, enrolls the acquired employees and dependents in the employer’s group health plan, but fails to notify the stop-loss carrier of the acquired group. This is more common when the acquisition is relatively small and notifying the stop-loss carrier is simply overlooked on the acquisition to-do list.
- Lasered participant or participant at reimbursement limit – Stop-loss carriers sometimes set a higher deductible for specific individuals or exclude them from coverage under the stop-loss policy altogether during the contract and implementation phase or upon renewal. This practice is known as “lasering,” and affected individuals are referred to as “lasered.” Not surprisingly, lasered participants are usually individuals identified as high cost claimants (often very high) by the stop-loss carrier when reviewing claims history information provided by the employer, and the practice of lasering exposes the employer to the costs for the known high-cost claims. Similarly, if the stop-loss policy includes annual or lifetime reimbursement limits, an employer can eventually become exposed to the claims costs for a high-cost claimant.
- Run-in/run-out gap in stop-loss coverage – This is usually a contracting oversight. Stop-loss policies may include run-in and run-out periods of coverage. A “run-in” period provides coverage for claims incurred during a fixed period prior to the policy year. For example, a stop-loss policy with a 15/12 run-in period provides coverage for claims incurred within three months prior to the beginning of the policy year. A “run-out” period provides coverage for claims incurred during the policy year but submitted for reimbursement after the policy year ends. For example, a stop-loss policy with a 12/15 run-out period provides coverage for claims incurred during the policy year and submitted for reimbursement within three months of the end of the policy year. Generally, there is a lag between processing claims under the group health plan and submitting them for reimbursement under the stop-loss policy, so it is usually a good idea to include a run-out period in stop-loss coverage. The gap issue occurs when the stop-loss policy’s run-out period ends too soon while claims under the group health plan for the prior plan year are still being processed and haven’t been submitted for reimbursement. It may also occur if gaps exist between the coverage provided under an expiring stop-loss policy and its replacement. This seems to occur with greater frequency during merger, acquisition, or reorganization activity and transitioning participants between different plans.
- Actively-at-work provisions – Group health plans are generally prohibited from imposing an actively-at-work provision before coverage begins for an otherwise eligible individual who has enrolled in the plan, but stop-loss coverage is not. Employers should beware of these provisions, because an employee who fails a stop-loss actively-at-work provision often fails because of a medical condition. This leaves the employer with a covered employee under the group health plan who is excluded from the stop-loss policy until the employee commences working.
- File feed errors – File feed errors are a potentially honest and yet painful mistake. These errors occur when the employer omits one or more individuals or other pertinent information from the claims history file feed provided to the stop-loss carrier. They may arise due to issues in merging data during the contracting and implementation phrase, or during the ongoing administrative process. A stop-loss carrier may challenge a reimbursement request for an individual who was never identified to the stop-loss carrier due to a file feed error, particularly if the stop-loss carrier believes the individual would have been a lasered participant under the policy.
Stop-loss is valuable reinsurance coverage and a useful planning tool for many employers, but employers need to be mindful that making exceptions when administering the group health plan, contracting errors, and other avoidable mistakes can leave an employer exposed to the very costs it attempted to avoid through the purchase of stop-loss coverage.