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Stop Loss Comes Under Scrutiny

Washington is the latest state to scrutinize Stop Loss insurance and on March 3, 2016, issued a document entitled “Stop Loss Provisions General Objections”. This document provides direction regarding attachment points, experience rated refunds, claims denial provisions and terminology.

In March 2015 the NAIC, concerned that there may be an increasing number of small businesses setting up self-funded medical plans as a result of the Affordable Care Act, released a draft White Paper to examine the issue. Self-funded plans are exempt from state insurance regulation so the review focused on the stop loss insurance purchased to protect the plans. The resulting white paper, “Stop Loss Insurance, Self-Funding and the ACA”, outlines the impact the ACA has on the small employer market and the risks of self-funded medical plans and then discusses regulatory options.

Regulatory focus is changing from just prohibiting excessive risk transfer to “protecting the interests of stop loss policyholders and the interests of the health benefit plan members who might suffer collateral harm....[if the] employer [is] unable to fulfill its fiduciary obligations”.

The focus of the report is on the small businesses that may be setting up these plans in order to tailor the benefits and thus contain the costs of providing medical coverage. Employers are allowed this flexibility because a number of the provisions of the ACA do not extend to self-funded plans and this allows the employer to have some choice in the benefits offered in the plan. Medical stop loss insurance is then purchased to protect the business against claims in excess of an agreed upon amount, known as the attachment point.

However, the White Paper presents the concern that carriers have been marketing medical stop loss insurance with lower and lower attachment points to small groups that may not be able to tolerate the risks associated with self-funded plans. It should be noted, however, that industry commentators point out that many small businesses with a healthy cash-flow are better able to manage claims that a large company with more stagnant cash flow. As a result, they state, the size of the business should not be of concern in itself.

While states have only minimal oversight of self-funded plans, which fall under ERISA, they may have regulatory authority over stop loss insurance and can approve or disapprove policies and rates if they are not in compliance with state laws and regulations. The level of authority differs by state and since the release of the NAIC Draft White Paper Connecticut and Maryland and the aforementioned Washington have issued guidance. In addition to other provisions all three states focus on the issue of lasering, a practice explicitly prevented by the ACA, but permitted for stop loss.

Lasering allows insurers to set higher attachment points for employees with health issues that may prove costly. Each state and the NAIC expressed concern that small employers can avoid compliance with the ACA by remaining a self-funded plan when costs are lower and while employees are healthy. Then they can move to an insured plan as the employees age or become less healthy – contributing to what is known as adverse selection. Within the ACA’s insurance markets, all groups are charged the same rate regardless of health and carriers cannot decline individuals with preexisting conditions. Thus self-funded plans may undermine the ACA’s small group reforms.

The position stated by the NAIC and these 3 states (CT, MD and WA) is that if stop loss is not properly regulated, adverse selection will worsen because stop loss serves more or less as an equivalent product to insurance and is competing in the same markets. Stop Loss is underwritten and the rates are based on health status and claims experience unlike insurance on the exchanges which is community rated.

Connecticut’s bulletin stipulates that certain features of previously approved stop loss plans have to be amended to remove any features that are “deemed to be health insurance and inappropriate for an excess loss policy”. Washington also addresses similar concerns and reviews provisions such as medical necessity determinations, annual dollar limitations in specific coverages for specific enrollees, rescission and mid-term rate increases.

No doubt, we will see other states provide similar direction in the coming months.

Regulatory Body White Paper/Report/Bulletin  Link
NAIC Stop Loss Insurance, Self Funding and the ACA (3/24/15)  Click here to access
Connecticut Bulletin Number HC-108 & PC-80 (11/12/15)  Click here to access
Maryland Interim Report on the Use of Medical Stop-Loss Insurance in Self-Funded Employer Health Plans in Maryland (12/15)  Click here to access
Washington Stop Loss Provisions General Guidance and Objection (4/22/16) No link as of yet but Stop Loss to be found under Life Insurance on the DOI website by clicking here.
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