SELF-FUNDING & STOP LOSS 101

OBJECTIVES

Explain the history and evolution of self-funding

Describe the advantages and items an employer should consider when
self-funding
Identify the basic concepts of stop loss, including specific and aggregate
coverage, maximums, contract types, leveraged trend and carrier selection

SELF-FUNDING BASICS

Self-Funding
Employer funds/pays its own claims rather than buying traditional health insurance
Employer often delegates administrative responsibilities to a TPA/Insurer/HMO
Employer can manage its exposure to catastrophic claims expense by purchasing stop loss
insurance (excess risk)

ERISA (Employee Retirement Income Security Act) (1974)

Formally recognized Self-Funded Plans
Specifically exempts most self-funded employee benefit plans from state regulation,
including premium taxes and mandated benefits

ALTERNATIVE FINANCING

Who Assumes the Risk?

Fully
Insured
Plans

Retrospective
Premium
Agreements

Minimum
Premium
Accounts

100% Transfer of Risk

Self-Funded
ASO w/ Stop
Loss Insurance

Pure SelfFunding (ASO)

No Transfer of Risk

SELF-FUNDING ADVANTAGES FOR AN EMPLOYER

Group controls the plan, not the insurer

Group can take advantage of their own good medical experience
Can result in more effective healthcare cost control

Employer Can be very flexible in health plan design

ERISA applies, often in lieu of state-mandated minimum benefit levels, easing
administration of multi-state plans

Eliminates most state premium taxes (savings of 2-3%)

SELF-FUNDING ADVANTAGES FOR AN EMPLOYER

May help employers cash flow

Pay claims as incurred no pre-funding or up-front reserve payments
Reserves held by employer instead of insurance carrier. Interest paid on these reserves
also remains with the employer.

Eliminates most risk charges and profit margins charges by insurers

Employer may purchase stop loss to reduce its exposure to losses due to
catastrophic claims and create more predictability

SELF-FUNDING CONSIDERATIONS FOR AN EMPLOYER

Risk Assumption/Risk Aversion

Cash Flow
Unpredictably Poor Experience
Assets Exposure
General Asset Plan
501 (c) (9) Trust Account

Fiduciary Responsibility
Risk Suitability

RISK SUITABILITY
What type of claims to fully
insure?

What type of claims to selffund?

Unpredictable: low frequency,

high severity

Examples

Predictable: low severity, high

frequency

Examples

Life/AD&D
Long Term Disability

Medical
Dental
Vision

WHO IS INSURED?

Employer / Plan Sponsor

The employer has made a promise to provide benefits
Existence or absence of stop loss does not change that promise

The individual / participant is NOT the insured

Stop loss reimburses the employer / plan sponsor for any claims the plan has paid over
the stop loss deductible

* Stop loss policy reimburses employer for losses associated with providing health benefits
to employees and dependents. Stop loss cannot pay providers or employees of the
employer.

TWO FORMS OF STOP LOSS COVERAGE

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SPECIFIC (INDIVIDUAL) COVERAGE

Reduces the employers exposure to high-cost individuals

Employer pays all claims for each individual
Stop loss carrier reimburses the employer for claims on individuals whose
annual eligible* expense has exceeded the specific deductible
At each contract renewal, each individual will be subject to a new specific
deductible
* Note: Eligible and reimbursable expenses under the terms of the stop loss policy may
differ from the employers plan document.

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SPECIFIC (INDIVIDUAL) COVERAGE

Example
Jane Smith suffers from renal failure and undergoes kidney dialysis. Her
claims total $300,000. Janes employer is self-funded, but has purchased
specific stop loss with a $75,000 deductible.
Total Claim:
Employer Deductible:

$300,000
$75,000

Amount reimbursed by Stop Loss Carrier:

$225,000

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SPECIFIC (INDIVIDUAL) COVERAGE

Eligible* Expenses
Medical
Rx

Ineligible expenses

Dental
Vision
Capitation
Administrative fees
Can also include certain vendor fees, such as case management, fee negotiation, etc.

May be sold as a stand-alone product (aggregate is not required)

* Note: Eligible and reimbursable expenses under the terms of the stop loss policy may
differ from the employers plan document.

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SPECIFIC DEDUCTIBLE LEVELS

Minimum and maximum guidelines for appropriate specific deductible

levels are based on expected claims and the size of the group.*
The following is a guideline for setting the specific deductible level for
cases quotes with aggregate coverage:

* Note: some states have mandated restrictions on specific stop loss levels.

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AGGREGATE COVERAGE

Reduces the employers exposure to high levels of claim utilization on the

group as a whole, rather than specific individuals.
The stop loss carrier reimburses the self-funded employer for all eligible claims that
exceed the aggregate deductible.
Claims in excess of the specific deductible are removed from the claims that apply toward
the aggregate deductible.
At each contract renewal, claims accumulations will be subject to a new aggregate
deductible.

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AGGREGATE COVERAGE

Reduces the employers exposure to high levels of claim utilization on the

group as a whole, rather than specific individuals.
The stop loss carrier reimburses the self-funded employer for all eligible claims that
exceed the aggregate deductible.
Claims in excess of the specific deductible are removed from the claims that apply toward
the aggregate deductible.
At each contract renewal, claims accumulations will be subject to a new aggregate
deductible.

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AGGREGATE COVERAGE

Aggregate coverage is offered at 125% of the expected claims

Aggregate coverage can also cover Rx, Dental and Vision claims
Aggregate coverage will not be sold alone.
Aggregate coverage does not provide catastrophic coverage
Specific protects the Aggregate

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AGGREGATE EXPERIENCE AND CREDIBILITY

Groups actual claim experience and manual rating are blended,

depending on the amount of credible experience available.
This figure is considered expected claims
A corridor is added, creating the annual aggregate deductible.
The corridor is the margin or cushion the underwriter includes to limit the
frequency and severity of aggregate claims.
The industry standard for the aggregate corridor is 25%.
By design, groups should not have aggregate claims, except in years of
extreme changes in payment patterns or large changes in utilization.

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AGGREGATE REPORT EXAMPLE

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SELF FUNDED / STOP LOSS COST DEFINED

Fixed Costs
Specific Premium
Aggregate Premium
Administration Fees TPA, PPO Network, UR, etc.

Variable Costs
Expected Claims

Total Costs
Fixed
Variable

Maximum Costs
Fixed
Attachment Point (Expected plus Corridor)

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STOP LOSS MAXIMUMS

Specific
Standard individual lifetime maximum is $1,000,000
Higher individual lifetime maximums are available at an additional cost
Make sure the stop loss maximum is in agreement with the employers plan document

Aggregate
Standard annual limit is $1,000,000
This is a separate limit from the specific stop loss maximum
If an employer feels this is too low, remind them that in order to hit this maximum, total
claims would have to exceed the expected claim figure by 25% plus $1,000,000.

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TWO IMPORTANT DEFINITIONS

Paid: Charges that, as of the date shown in the contract basis, are:
1. Covered and payable under your employee benefit plan, and
2. Have been adjudicated and approved, and
3. A check or draft for remuneration is issued and deposited in the U.S. mail, or other
similar conveyance or is otherwise delivered to the payee, and
4. Sufficient funds are on deposit the date the check or draft is issued

Incurred: The date on which medical care or a service or supply is

provided to a covered person for plan benefits under the employee
benefit plan for which a charge results.

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INCURRED CONTRACT

Incurred contract to be eligible under the specific, the claim must be

incurred in the contact period. There are no time requirements for when
the claim is paid. However, a claim notice must be submitted within 12
months after the policy period. For renewal years, the specific contract
will remain an incurred contract. Appropriate if group is currently fullyinsured or has run out protection with current stop loss carrier.

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12/15 CONTRACT

Incurred in 12 and Paid in 15 (12/15) Eligible claims must be incurred

during the contract period and paid within the contract period or the
three months immediately following. This is an abbreviated version of the
true incurred contact. Variations include 12/18 and 12/24 contracts.

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12/12 CONTRACT

Incurred and Paid (12/12) Eligible claims must be incurred and paid
within the policy year. For renewal years, the contract will convert to a
paid contract and the claims will be eligible under the renewal contract
regardless of the date incurred, as long as it was incurred on or after the
initial effective date of the contract. This is an appropriate first-year
contract type for a group that is currently fully-insured or a group that is
self-funded and the policy has a run-out provision.

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PAID CONTRACT

Paid on renewal, a 12/12 or 15/12 contract becomes a paid contract.

Claims will be eligible under the renewal contract regardless of the date
incurred, as long as it was incurred on or after the initial effective date of
the employers self-funded plan. This is appropriate for renewal contracts
that started out as 12/12 or 15/12 contracts.

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15/12 CONTRACT

Run-In (15/12) Claims incurred up to 90 days before the effective date

and paid during the first contract period will be eligible under the policy.
For renewal years, the contract will convert to a paid contract. This is
appropriate for a group that is currently self-funded with no run-out
provision, but is new to the carrier.

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GLOSSARY

Fixed Cost All firm dollar costs of a self-funded plan. Includes specific premium, aggregate
premium, administrative fees, etc. Also called hard collars.
Soft Dollars Claims costs, which are variable although often capped. Also referred to as claim
liability or attachment point.
ASO Administrative Services Only. A term used by carriers and HMOs to designate the service
they provide to self-funded employers.
Self-funding (Self-insurance) These terms are interchangeable.
TPA Third Party Administrator
MCO Managed Care Organization
ERISA Employee Retirement Income Security Ace of 1974
Experience a detail of the actual claims paid during a specified time period a particular
employer groups covered members.
Fiduciary any party who has discretionary authority or responsibility for the management or
administration of a plan.
Plan Document A document which details the terms and provisions of a plan.
Corridor the margin or cushion the underwriter included to limit the frequency and severity of
aggregate claims.
Census A collected detail of an employers member population, including number of covered
lives, coverage status, sex, date of birth, and other demographic information.
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QUESTIONS

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