Each year, most large employers and an increasing number of mid-sized and even small employers choose to self-fund their employee health benefits plans rather than purchasing traditional health insurance. They do so because self-funding offers attractive cost-saving features, such as avoiding premiums, premium taxes and state mandatory benefits laws. Deep within the structure, however, are certain disadvantages that are hard to appreciate or understand until a problem arises. Many of these problems are associated with an important back-drop of the self-funded structure: stop-loss insurance policies.
Stop-loss policies are roughly comparable in function to reinsurance. They are designed to provide insurance to self-funded plans that pay claims over an agreed-upon sum. Stop-loss can be either plan-wide (aggregate stop-loss) or based on a particular individual’s annual claims. While many plans choose to purchase individual stop-loss limits, the decision whether to purchase aggregate limits as well can vary considerably by plan.
Stop-loss insurance policies are the only actual insurance products in the self-funded structure. The policyholder, though, is the self-funded plan or the employer, not the plan participants who receive health benefits under the plan. Thus, there is no privity between the plan participants and the stop-loss insurance company. More importantly, a denial of a stop-loss claim by a stop-loss insurance company should not affect the plan participants. Regardless of whether the plan succeeds in recovering insurance company reimbursement of claims that exceed the stop-loss limits, the plan must independently address and resolve its contractual obligations regarding payment of the underlying claims.
Potential Problems
Problems arise between self-funded plans and their stop-loss insurance companies in a myriad of ways. One example involves the issue of run-out insurance coverage. To recognize the importance for such coverage, all that is needed is an understanding of the phrase “incurred but not received.” The key point is this: just because a plan’s contract year expires at midnight on December 31st and the next one begins at 12:00 a.m. on January 1st necessarily does not mean that the plan will have seamless insurance coverage. Instead, there must be a provision requiring the stop-loss insurance company to provide “run-out” coverage—namely, to cover claims that were incurred prior to the turn-over date but not paid until after it.
Such coverage is important because there will always be a few claims in the pipeline. That fact is inevitable because health services are continually being provided and also because the plan has no control over when the bills from the third-party providers for previously rendered services will arrive in the plan’s mailbox. Without run-out insurance coverage, self-funded plans face a risk of being uninsured for any and all claims that (a) fall into the gap; and (b) exceed the stop-loss limits.
Thus, all corporations that decide to self-fund should be fully informed about run-out coverage that they should purchase or have purchased, and should ensure that it is adequate to serve their needs during a transition.
Coverage Bases
Stop-loss insurance policies typically provide coverage based on one of the following bases:
In the first case, a “paid” or “12/12” basis, there is no run-out coverage for a claim that is incurred during one period and paid during the next period, even if the claim hits and exceeds the agreed-upon stop-loss limit when it is paid.
In the second example, there is no run-out coverage, but instead there is “run-in” coverage, meaning coverage for a claim incurred in the final three months of the previous policy period and paid during the current policy period.
In the third example, there is run-out coverage for three months, meaning that claims incurred during the policy period and paid within three months after the policy period are covered.
Avoiding A Coverage Gap
The importance of this issue is illustrated by a recent case in which a self-funded corporation fell into a gap in coverage—but managed to climb out of it.
The corporation’s stop-loss policy provided coverage on a “paid” basis. At the end of a policy year, the corporation decided to switch insurance companies. Almost immediately after the start of the new year, the corporation received a substantial number of claims regarding a single claimant, many of which resulted from a back-log in a third-party’s billing practices. The claims substantially exceeded the plan’s stop-loss limits, so the corporation submitted them to both the original and successor stop-loss insurance companies.
Both stop-loss companies, however, immediately denied coverage. The original insurer advised that it had no obligation to provide run-out coverage and the successor insurer took the same position with regard to run-in coverage. In short, the claims fell right into the gap.
Fortunately, this was not the end of the story. After consulting with counsel, the corporation discovered that the stop-loss company had been obligated by state law to offer run-out coverage to the corporation at the time of contracting—but had not done so. The remedy, under that same state law, was a mandate for the original insurer to provide the run-out coverage regardless.
The corporation immediately informed the stop-loss company of the law. Following a period of reluctant investigation, the stop-loss insurer company paid the claim in full.