Stop-Loss Insurance Contract Carve-Outs: Beware of Potential Pitfalls

A growing number of U.S. employers offer self-insured employer-sponsored health plans. Reduced costs, increased cash flow, decreased taxes, access to data and improved service are just some of the potential benefits.

Most self-insured employers also purchase stop-loss insurance (i.e., reinsurance). In this scenario, the employer pays medical claims up to the stop-loss coverage level. Eligible claims beyond that are reimbursed by the stop-loss carrier, making the value of reinsurance immeasurable when a large claim occurs or when higher-than-expected aggregate claims occur during the plan year.

However, stop-loss insurance coverage is nuanced. Significant variations between contracts and the way in which contract administration is managed can have dramatic effects on how, when or even whether a claim is covered.

Price Is Only One Factor

For a number of years now, the competitive landscape has fostered many more circumstances where the stop-loss policy has been awarded to a carrier other than the claims administrator, commonly referred to as a carve-out. The small front-end premium savings has the potential to create enormous gaps in coverage, putting the company at risk for financing claims that it thought were insured through the stop-loss policy.

Employers should work with insurance professionals to thoroughly understand contract terms and total expected and maximum liability before finalizing decisions about stop-loss coverage. A few contractual items to watch for include the following:

• Unique lifetime, annual or specific condition maximums or exclusions
• Coverage inconsistencies with underlying medical plan benefits
• Disclosure requirements and contingent quotes
• Reimbursement timing issues that can cause cash flow stress
• Run-in and run-out provisions (true total liability for claims incurred and received before and after the policy effective date)
• Lasers (special risks excluded from the policy)
• Guaranteed renewability
• Pooled versus experience-rated (how renewal rates are determined)

Let Us Help

If your company is considering self-insurance or is currently self-insured, Hylant’s employee benefits specialists can walk you through the details and policy fine print. Contact an expert if you would like assistance.