Why the Stop Loss Decision is Critical for Larger Self-Funded Employers

This edition of MRM's "Ask the Expert” features advice from Trion Group. Please send questions to Modern Restaurant Management (MRM) magazine Executive Editor Barbara Castiglia at bcastiglia@modernrestaurantmanagement.com.

There are stories nearly every day in the media about innovations in healthcare, breakthrough treatments, and in some cases cures for various illnesses. For example, think of all the new cancer treatments like Keytruda and Opdivo that have come to market in recent years that extend life. What’s frequently omitted however, is the cost of some of these miracle cures.

Over the past five years, nearly every one of our restaurant groups has incurred at least one cancer claim of at least $300,000. We also have seen a dramatic increase in the frequency of claims exceeding $1,000,000. 

What’s driving these stop loss renewal increases of million dollar claims is the specialty drug pipeline and gene therapies. This issue impacts employers in all business sectors; however, for employers in the restaurant business, making sure your risk is placed appropriately becomes even more complicated. 

Stop Loss Coverage Is Risk Management

On a basic level, stop loss insurance provides protection against catastrophic or unpredictable losses. This means astrategic decision on stop loss coverage involves balancing the cost of guaranteed premium payments with the potential financial impact of accepting additional risk. Factors to be considered include:

• The deductible level of specific stop loss coverage chosen
• Whether to accept lasers that limit or exclude risk on individual high claimants 
• The advantages and disadvantages of no new laser contracts
• Whether to purchase aggregate stop loss coverage

It is important to recognize that while the answers to these factors will differ by employer, some popular features found in stop loss contracts that are valuable to many self-funded employer-sponsored plans may not be as valuable in the restaurant sector. 

Specific Stop Loss Point

Ultimately, striking the right balance between the risk transfer point – i.e., when the stop loss carrier begins paying for the cost of a claim, otherwise known as the specific deductible – should be based on the group’s tolerance for risk, balanced with cash flow considerations. A basic rule of insurance is that over time, the less insurance purchased will result in a lower cost. If an employer’s risk tolerance is low or if cash liquidity is an issue, their finance team may elect to put more money into stop loss premiums (risk protection), correspondingly reducing potential cash outlays for claims (i.e. a lower deductible). One way to determine the right step forward, is through a thoughtful stop loss marketing exercise: evaluate the various deductible options versus premiums and determine the number of claims required to break even or offset the lower premium. 

Lasers or Additional Premiums?

With the dramatic growth in catastrophic claims, almost every employer has to confront the question of whether or not to accept lasers. A principle of stop loss coverage is that it is designed to protect against unknown risk. This does not include a cancer patient who is currently taking a prescription drug with a $20,000 monthly cost, which is a known risk. In this situation, the stop loss carrier will either build into the premium rates the expected $240,000 in claims, or laser the individual member with a $240,000+ deductible, shifting that risk back to the plan.

We have found that many of our clients choose to accept lasers rather than paying additional premiums. These clients arrive at this decision based on a variety of factors, including the finding that many high claimants stop working and drop their coverage. We also find that high claimants find subsidies for coverage through the Affordable Care Act (ACA) Exchanges, which may be less expensive than electing COBRA.

Laser Versus No New Laser Contracts?

Another strategy that’s been prevalent in recent years in the stop loss market has been a contract that does not permit new lasers to be deployed. To be meaningful, this provision is typically offered in conjunction with a rate increase cap. This contractual provision does have an impact to the stop loss rate, however it does not prohibit the plan sponsor from considering lasers at their subsequent renewal. Given the rate impact, we tend to see many clients weighing the increased cost as more important than the potential risk of new lasers being added at the next renewal. 

Aggregate Stop Loss?

Specific stop loss covers the risk associated with catastrophic claims in excess of an agreed-upon deductible per covered member. Aggregate stop loss on the other hand reimburses the plan for paid claims in excess of a specified total level, which varies but usually ranges between 120 to 125 percent of expected claims. 

The likelihood of having an aggregate stop loss claim is extremely small, but it does provide sleep-at-night insurance for groups concerned with the risk associated with claim volatility.  Smaller groups may find aggregate coverage appealing because as the group size increases, claims become more predictable. Again, we tend to find that many clients in the restaurant sector tend to forgo this coverage given the perceived lower risk.

What Else Is Different for the Restaurant Sector?

• Low medical plan participation: Some stop loss carriers are concerned that a low percentage of participants means only those with high risks chose to participate in the plan. This translates to many stop loss carriers declining to quote or offering uncompetitive rates. We work with several medical and stop loss carriers that understand that while participation may be lower in the restaurant sector, the risk may also be lower for all the reasons already reviewed. Carriers experienced in the challenges of the restaurant sector and with variable hour populations in general will underwrite the risk and rate appropriately. 
• Stop loss captives: While captives are prevalent in restaurants on property and casualty coverage lines, they offer several attractive features for a restaurant group looking for stop loss coverage. First, a captive structure may offer lower risk transfer points than a traditional stop loss quote. This enables “smaller” groups to take advantage of the inherent savings of self-funded plans without incurring significant claims risk. We have structured some groups with a risk transfer point as low as $25-35,000. Second, while the premium will be higher with a lower risk transfer point, a captive provides the opportunity for a dividend if the group and other captive members have good claims experience. Unlike P&C captives, stop-loss captives can calculate and distribute dividends within eight-to-10 months of the plan year-end. 
• Specialty coverages: Some stop-loss carriers offer special policies, or carved out coverage for ultra-high cost claims, such as transplants, renal care, gene or cellular therapies. It’s a fact that high dollar claims are increasing, principally due to health care innovations and the increase of cost and prevalence of specialty drugs. As these types of coverage grow, their price and how they integrate into traditional stop loss coverage will only add complexity to the risk management process. 

Fully insured or self-insured groups must have a good understanding of their potential risk and the potential cash flow impact. While restaurants may see fewer carriers willing to offer competitive quotes, there are ways to tailor the risk and manage the cost. The risk of an uncovered claim is too high to not thoroughly understand available options and choose coverage appropriate to your risk tolerance.