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Health reform mandate pushes employers to rethink medical stop-loss coverage


While a growing number of small and midsize employers use captives to fund primary layers of medical stop-loss coverage for their self-funded health care programs, the health care reform law is prompting some large employers to also explore the idea.

Small and midsize companies that self-insure health benefits for their employees typically purchase medical stop-loss coverage to pay individual claims above a certain threshold.

While the approach generally did not appeal to large employers because most had the wherewithal to pay claims up to their benefit plan coverage limits, the Patient Protection and Affordable Care Act's bar on setting annual or lifetime caps on employee health benefits has prompted some large employers to look for ways to stem potentially unlimited liabilities.

Safeway Inc. examined the feasibility of using its Bermuda-based captive insurer, Milford Insurance (Bermuda) Ltd., to fund stop-loss coverage for its self-funded health plan for its 171,000 U.S. employees, said Ward Ching, Pleasanton, Calif.-based vice president of risk management operations.

The grocery chain stopped buying commercial stop-loss cover eight or nine years ago after determining that it could withstand significant medical claims, he said.

“At Safeway, we are self-insured, self-administered with high retentions on most lines of coverage, so there isn't a question about appetite for risk,” Mr. Ching said. “What we do have a concern about is volatility. And we didn't get too far into the math to figure out in terms of medical stop-loss for us ... the volatility variable was harder to get our arms around; and if we couldn't get our arms around it, it was not a candidate for the captive,” he said.


While Safeway decided against using its captive for medical stop-loss in its post-health care reform law review, other large employers are choosing this option, said George O'Donnell, technical director at Aon Global Risk Consulting in Somerset, N.J.

“We are seeing a number of situations in which companies that previously did not consider stop-loss ... are now feeling a little uncomfortable because under health care reform they could be exposed to unlimited liability,” Mr. O'Donnell said.

“Many of our clients are becoming aware that the management of this type of risk within the company is probably best handled by the risk manager through a captive as opposed to having it handled through” human resources, which historically handled stop-loss purchases, Mr. O'Donnell said.

“Usually at the end of the year, HR is concerned with things like annual enrollment and making sure that people's benefits packages are supplied to them appropriately, and answering questions relating to the core business of HR,” he said. “The last thing HR needs or wants to be doing at that same time of year is shopping the market for stop-loss. It's much easier to turn it over to the risk manager and have the captive issue the stop-loss and then have the captive purchase reinsurance.”

Several clients last year and so far this year have examined their captives to cover stop-loss, he said.

Steve Gransbury, head of specialty at QBE North America in Boston, said he is seeing large employers in higher education, energy and medical care using their captive to fund a $500,000 layer of stop-loss coverage above a $250,000 self-insured retention, then purchasing commercial stop-loss insurance attaching at $750,000.


In addition, some hospitals are using their captives “to offer stop-loss to their employer clients,” Mr. Gransbury said. “We've done several arrangements at this point” in which the stop-loss policy is issued by QBE, a division of Australian reinsurer QBE Insurance Group Ltd., and then reinsured by the hospital captive, he said.

For certain small and midsize employers, a group captive approach may be appealing, experts say. In addition, large employers that already self-insure and have a captive may find stop-loss coverage is a way to limit potential costs (see related story).

Still, many large employers ultimately decide against using their captives to fund stop-loss coverage for their self-funded benefit plans, said John Currie, principal emeritus at consultant Ascende Inc. in Houston.

“We've looked at it for clients that have upwards of 10,000 employees,” he said, “but we haven't seen where it makes economic sense yet.”

Using a captive for stop-loss coverage usually isn't feasible unless an employer already pays at least $1 million in stop-loss premiums a year, he said.