Why Traditional Stop-loss Insurance Just Isn’t Enough

By Pareto Health
February 29, 2024

The landscape of health insurance is complex, and self-funding is no exception.

We can (and do) talk all day about the benefits of self-insurance. But not all self-insured plans are the same, especially when it comes to stop-loss insurance – one of self-funding’s biggest differentiators.

Stop-loss Insurance in a Nutshell

Medical stop-loss insurance protects against catastrophic, unpredictable, or numerous claims.

Stop-loss coverage is critical for self-insured employers – without it, they’re 100% liable for all losses. While an employee’s broken foot might be manageable, the financial impact of health events like cancer can be staggering, often going beyond the means of midsized businesses.

Traditional Stop-loss Plans (and Why They Don’t Work for Midsize Employers)

Don’t be fooled: Ordinary stop-loss policies are still volatile, thanks in large part to a process known as “lasering.”

Lasering is a practice that isolates high-risk individuals and assigns them a higher stop-loss threshold (deductible) than other employees.

Consider the following scenario.

An employer has a stop-loss policy with $400K in premium. During the year, one of the employers under this plan develops cancer, and their medical costs total $2M. The carrier pays these claims, but if they were to continue paying for future claims (and these claims rarely last for less than a year), then it would take 5 years for the stop-loss premium to support those claims.

Since an insurance carrier is not in the business of losing significant amounts of money, and their policies are written for one year at a time, they’re forced to shift the risk onto the employer (via a laser) or increase the premium that they collect.

If an employer opts out of the laser and their stop-loss policy doesn’t have a no new laser/rate cap provision, then their renewal can be hundreds of percentage points over the previous year.

The typical percentage of stop-loss premium in a self-funded policy is only around 20-30% of total costs – with other costs coming from administration and the actual payments for claims. So, a sizable premium increase can turn smaller employers away from traditional self-funding.

This means the employer is faced with either paying for these claims themselves or accepting an unsustainable increase in their stop-loss premium.

Is there a way out of this problem?

In the traditional market, there isn’t. This is precisely why we’ve created the group captives at ParetoHealth: They provide greater protection than any other stop-loss structure on the market.

A Robust Stop-loss Structure

ParetoHealth provides employers with multi-year stop-loss coverage – the only one of its type in the market. When employers join us, they get a 30% rate cap on stop-loss renewals, year over year, and no new lasers as long as they’re in our program. If we factor in the usual portion stop-loss premium costs, this is approximately equivalent to a 7.5% fully-insured renewal.

And that’s the highest renewal we’ve ever given in our entire history.

We make this work by block underwriting, or treating the entire captive as a single purchaser. Let’s build on our earlier example: If the $2M cancer claim is part of a block worth a total of $1B+ (pooling all the premiums together), then the economic realities of the carrier suddenly begin to look very different.

Individual policies are written to distribute the impact of large claims over the entire entity. When there are more than 2,000 employers in the captive, that can mean that individual large claims only require a slight increase at renewal.

This does mean that the price of stop-loss coverage is slightly higher (1-2%) in a good year, but it also means that the impact of a bad year is potentially hundreds of percentage points less than it would be if the policy were written for one employer.

Good Years Vs. Bad Years

We’re big believers in multi-year stop-loss coverage (if you couldn’t already tell).

Of course, there will be good years. Sometimes, there will be bad years.

Our data shows that most employers will experience one “bad” claims year every five years. It’s not a question of if there will have a bad year, it’s when. Worse, if a large, multi-year claim appears on an employer’s plan, they could be dealing with the fallout for many years to come.

That’s a catastrophe that employers can’t afford.

We can’t predict when a potentially bad year will occur. But a top-tier self-funded plan like ours will always take this into account. With ParetoHealth, you spend a few more percentage points during a good year to pay hundreds of percentage points less during a bad one.

What does this mean – and how do we make it happen?

Let’s look at the graph below.

ParetoHealth’s Renewal Methodology

Orange represents employers that had poor claims experiences this year. Instead of sticking them with sky-high renewals, we spread the premium increases (in green) across the entire block. No one employer feels the impact of a terrible year.

We’re all in this together. We understand and prepare for the inevitable: At some point, every employer will have a less-than-stellar year. Under our captive model, paying a little more annually means that other employers in this self-funded pool can easily support this employer when their bad year comes.

It’s a game-changing approach for many small and midsized businesses.

Affording a large, ongoing claim – one that significantly affects renewals for years – has long been out of the question. But with ParetoHealth, and a minimal investment through a small renewal increase in good years, employers can greatly mitigate their bad ones.

Making the Stop-loss Switch

Stop-loss coverage is a necessity under self-funded plans. But you have the power to choose your structure.

It’s clear that the traditional approach has never really worked in favor of employers. If you’re interested in breaking the 12-month cycle and switching to a more sustainable solution, then ParetoHealth is here to help you there.

Contact us to see what you can save.

There’s a Better Way to Do Employee Health Benefits

Join an upcoming webinar to learn how ParetoHealth turnkey employee health benefits solutions deliver the scale and resources mid-sized businesses need to self-insure with total confidence. By combining a captive model with comprehensive medical and pharmacy cost containment strategies, our members realize significant cost savings with multi-year protection.

Learn why 97% of members who join ParetoHealth, stay with ParetoHealth.

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