Establishing an Analytical Framework for Measuring the Role of Reinsurance in the Health Insurance Market. 3. Self-funded Employers


Employers offering self-funded health benefit plans to their employees often purchase stoploss coverage to limit their loss exposure. Informants stated that the employer stoploss market was primarily aimed at employers with more than 50 employees, although some carriers were selling stoploss arrangements to employers smaller than that. As employers get larger, their need for stoploss decreases; informants indicated that self-funded employers with over 5,000 employees rarely purchased stoploss coverage. The decision to buy stoploss is also related to the cash flow of the company and the length of time the employer has been self-insured. Well financed employers and employers who have experience with self-insurance are less likely to purchase stoploss.

Employer stoploss coverage is provided on both a specific and aggregate basis. Specific stoploss limits the employer's exposure for the costs associated with each covered life. Aggregate stoploss limits the employer's total exposure as a percentage of some expected amount of claims. Smaller self-funded firms are likely to purchase both specific and aggregate coverage, whereas larger self-funded firms are more likely to just have specific coverage. One informant estimated that among employers with 1,000 lives, all have specific coverage but only about half buy aggregate coverage. Firms with more than 1,000 lives tend to purchase only specific coverage. Aggregate coverage is sometimes "thrown-in" for larger employers, for whom aggregate coverage is not as important because their claims are more predictable. Aggregate-only policies (without specific coverage) appear not to exist.

Stoploss thresholds, or deductibles, (both aggregate and specific) are computed based on a number of factors, including the demographics of the group and the type of coverage. Informants suggested that most employers absorb for every covered life approximately 10 percent of expected annualized aggregate claims. In other words, the specific deductible is set at roughly 10 percent of aggregate expected claims.20 For example, an employer covering 50 lives with an expected annual cost per life of $2,000 would have $100,000 in expected claims over the year. The specific deductible for this employer would be set at approximately 10 percent of $100,000, or $10,000 per employee.21

Aggregate stoploss thresholds also vary by the size of the firm. Smaller companies (e.g.., 50-100 lives) usually have aggregate stoploss limits of 120 to 125 percent of expected claims. Larger companies have lower stoploss limits (because their claims are more predictable), more often between 115 to 120 percent of expected claims. Very large firms, if they purchase aggregate coverage, may have a threshold of 110 percent of expected claims.

Informants estimated that there were about 150 to 200 providers of employer stoploss coverage.22 Employers usually purchase stoploss either from third party administrators (TPAs) or from brokers. One informant noted that in California and Chicago, brokers tend to arrange coverage, while in the majority of the country, TPAs drive the market. Like a broker, a TPA will contact several insurers in an effort to get the best price. This is because a TPA that processes an employer's claims has a fiduciary relationship with the employer, and must demonstrate due diligence as well as compete with other TPAs.

20 One TPA that deals exclusively with small employers provided the rule of thumb that the specific deductible is set at 10 percent of the aggregate stoploss threshold, which is somewhat higher than expected claims.

21 This is a general rule of thumb, and is not as applicable to large employers, for which the specific deductible would almost certainly be smaller than ten percent of expected claims. One informant suggested that the specific deductible usually ranges from two to twelve percent of aggregate expected claims.

22 One informant suggested a much higher number (over 300), but several others estimated between 150 and 200.