I imagine you’ve heard about several different ways to manage your stop-loss coverage as a mid-sized employer. I’m going to explain on option, stop loss coalitions, and how to make these contracts work for you. With group stop-loss coalitions you would purchase stop loss coverage as a group to help mitigate your risk, like you might do with your workers’ compensation coverage. There are three types of group stop-loss coalitions, 1) broker coalitions, 2) group consortiums, and 3) employer-owned captives.
Group broker coalitions and group consortiums are generally the least effective because the underwriting is often uneven and the coalition itself may have rules that don’t allow the reinsurer to underwrite the stop-loss appropriately. For example, the coalition may not be able to rate on the real risk of the group so you don’t receive appropriate cost decrements for tools you are using to contain costs. Or they may have to accept all clients from the broker even if the claims are out of control. Neither of these situations benefits you.
What you want is an employer-owned captive which is designed to break even, rather than focus on profit, applies consistent underwriting standards to all its members and requires the same cost containment tools to all plan members.
Many of you may not have considered spreading risk in this way when it comes to health insurance. However, when you do this, when everyone is using the same tools to deliver high quality care at a fair price, you can insulate yourself more effectively from a bad claims year –and everyone has one periodically.
Here is how it works: when you’re having a bad year and your fellow coalition participants are having a good year, your risk is dispersed and you are more protected. And, the following year you may be having a good year and another employer may be having a bad year, but it all evens out year over year.
So, how exactly does the coalition work?
The way a coalition works is you have each employer’s plan and then an overall risk that the entire plan shares. So, as an individual employer, you may accept a specific deductible per claim of $40,000 or$50,000, and the coalition’s (all the employers together) deductible could be $250,000. This is called the captive layer. Any claim that costs more than $250,000 will go to the reinsurer for payment.
What that means is you pay the first $40,000 and the coalition pays the next $210,000. Let’s say you have a claim that goes over the captive layer ($250,000), that will go to reinsurance carrier for reimbursement. By having that extra second layer, you are protecting yourself from piercing your stop-loss coverage, keeping your stop-loss costs stable.
The advantage here is that the group as a whole will be going in the same direction, so if you’re stumbling, someone else is going to pick you up, and next year it might be you picking someone else up.
The one disadvantage to the coalition is that it is collateral owed, meaning you may need to post collateral when you join the coalition. Generally, the collateral will be 10-20% of the stop-loss premium. So, let’s say your stop-loss premium is $100,000, you may be required to post $10,000 in collateral.
If executed properly, a captive can be a strategic tool to contain costs and spread risk among a group of employers with the same cost containment philosophy.
