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'Lasers' point to potential downside of self-insuring health benefits

'Lasers' point to potential downside of self-insuring health benefits

WICHITA, Kan.—After 11 months of self-insuring its health benefits, Meritrust Credit Union is 24% under budget for the year.

“It's performing quite well,” said Byron Stout, vp of human resources at the Wichita, Kan.-based credit union, whose self-funded health benefit program covers “330 belly buttons,” as he puts it, 220 of which belong to Meritrust employees.

“As of the end of May, we were at 76% of what was budgeted for the year, and we are still trending under budget,” Mr. Stout said.

But one employee's medical claims have exceeded the $50,000 stop-loss attachment point, which is causing some concern given the relative youth of the company's population.

“Our average age is 34,” Mr. Stout said. “Our biggest cost has been pregnancy.”

But the employee whose claims have exceeded the stop-loss threshold was diagnosed with cancer, and now the stop-loss carrier is doing what is commonly known in the industry as “lasering.”

Lasering is a common stop-loss industry practice of setting higher coverage attachment points for certain plan members based on their prior claims experience or the likelihood that they will become high-cost claimants in the future.

Mr. Stout shared his story with the hope it would help other employers be aware of one of the potential pitfalls of stop-loss insurance.

“Stop-loss has lasers. You submit people who potentially will pierce the layer, and the carrier adjusts the attachment point upwards if the underwriters think that person has a predisposition for a certain illness. For example, if a person gets cancer and they have complications, the employer might have to share any additional cost,” he said. “But if the person gets some other illness or condition, the laser doesn't apply.”

Stop-loss lasering is a common practice in the lower middle market, according to Jon Rauser, president of the Rauser Agency in Milwaukee. He estimates that 25% to 30% of self-insured employers with fewer than 500 employees has a laser.

For example, if a company buys stop-loss with attachment points below $60,000, the insurer might put a $100,000 laser on an individual who is projected to have claims in excess of $60,000, explained Mr. Rauser, who is not involved in Meritrust's benefit plan. The employer then is required to pay claims up to $100,000 on that individual, he said.

Even with a laser, total benefit costs usually end up being significantly less than if the employer purchased insurance, according to Mr. Rauser.

“Say you have a group with 45 singles and 20 families, and the premiums are $400 for single coverage and $1,025 for family coverage. That comes out to $38,500 a month or $462,000 annually,” he calculated.

“A different kind of lasering might happen in a fully insured group,” he said. “If that same medical condition surfaces in the fully insured group, the carrier will give the group a 50% or 60% increase,” Mr. Rauser said.

That could bring the total cost to $61,600 a month or $739,200 annually.

But in a self-insured program, “if you have one laser on renewal, the increase might be 12% to 15%, and you might have a $100,000 laser on an individual,” Mr. Rauser said.

That would increase monthly stop-loss premiums of $78 for individuals and $205 for family coverage from $7,600 a month or $84,000 annually to $8,740 a month or $104,880 annually.

“The arithmetic still works out, but the cash flow issue is daunting for some small businesses. You might have to come up with $100,000 in a bad month, and you may not be reserving for that,” Mr. Rauser acknowledged.