Understanding the Medical Stop-Loss Market
By Dave Nelson, Keith Passwater and Peter Robinson
Health Watch, June 2022
Employers, insurers, HMOs and health care providers spend $26+ billion per year protecting themselves from a few high-dollar medical claims that exhaust the company’s profit for the year.[1] This article details the medical stop-loss coverages purchased by HMOs, small insurers and providers taking delegated financial risk in payor agreements. Along the way we will identify strategies purchasers often use to save money on medical stop-loss.
HMO Re
The medical stop-loss product purchased by small and mid-sized health insurers, health plans and HMOs tends to be called HMO Re. Generally, these purchasers buy stop-loss as a defensive play—executive leaders seek earnings protection and state departments of insurance seek solvency protection for insured constituents. Despite the need for protection, the HMO Re market is a small market segment. We estimate HMO Re premium volume is roughly 5 percent of the premium volume of employer stop-loss. If anything, HMO Re volume has decreased as small regional health plans have been purchased by larger insurers.
HMO Re Specific (Spec) attachment points tend to vary by line of business (commercial, Medicare, Medicaid, etc.). For instance, it is fairly common for an HMO Re purchaser to vary attachment points “Spec” by segment in relation to the segment membership volume (fewer members ~ lower Spec attachment point). Besides varying Spec levels by segment membership, plans often vary Spec levels for two other reasons:
- When entering a new population type, such as Medicaid, a plan may buy reinsurance at a lower specific attachment point until its care management for that segment is established.
- Reinsurance companies and brokers may steer buyers to differing attachment points with attractive pricing.
From an enterprise risk perspective, however, Spec attachment points are better set based on the risk of the entire enterprise. Segment earnings volatility can be handled through an internal pooling mechanism, eliminating reinsurer administrative and risk charges.
A nuance here is that commercial reinsurance is typically more expensive—often two or three times more—than Medicare reinsurance at Spec attachment points in excess of $100,000. This is especially true at attachment points in excess of $1 million, since there is limited Medicare exposure in excess of $2 million per claimant. Commercial stop-loss claims are often much higher than the amount Medicare pays for the same procedure, particularly for out-of-network inpatient care where commercial plans may reimburse at three to five times Medicare rates. The absence of maternity claims may also explain some of the rate difference, although at some attachment points the absence of maternity claims is offset by the high cost of end-of-life care.
Reinsurers often require the reporting of claims that exceed 50 percent of the Spec attachment point. This allows the reinsurer to establish appropriate reserves for claims incurred but not reported. Such reporting also allows the reinsurer to help in the management of an ongoing large claim. While not all reinsurers have such capabilities, many do offer claim management programs to mitigate the magnitude of large claims. Some of these programs operate effectively to the purchaser’s benefit, even on claims below the stop-loss attachment point. Examples of such programs include:
- Access to specialty services at favorable rates utilizing the buying power of the reinsurer for things such as:
- Organ transplant networks
- Specialty pharmacy
- Chronic kidney disease providers
- Cardiac care support services
- Complex cancer treatment
- Specialty physician consulting
- Air ambulance services
- Forensic bill reviews used to negotiate reductions in out-of-network claims where either the care setting or costs identify possible irregularities
- Comprehensive medical management consultations or evaluations
- Training and continuing education opportunities for plan clinical staff
The reporting of claims that exceed 50percent of the Spec attachment point also applies to the Provider Excess marketplace.
Provider Excess
In contrast to HMO Re, the purchase of Provider Excess (PXS) tends to be an offensive play that allows a provider to expand its business model from fee for service (FFS) to include risk-based revenue. By reinsuring the risk of a catastrophic medical claim, the provider can more safely enter into risk deals.
Stop-loss purchased by providers, while small today in relation to the employer stop-loss market is on the precipice of a big increase. (We estimate PXS premium volume is roughly 5 percent of the premium volume of the employer stop-loss market.) This increase is fueled by pressure from both government entities and employers for providers to take more financial risk. For example:
- US policy makers are supportive of state block grants and eligibility changes that enable private companies to assume risk for high-need Medicaid populations (such as dually eligible Medicare/Medicaid members and institutional members).
- Physician groups taking on substantial financial risk (as defined by the Centers for Medicare & Medicaid Services, or CMS, for Medicare Advantage risk contracts) must buy provider excess if their membership is low. CMS requires providers taking risk on Medicare Advantage to purchase PXS when the aggregate life count is less than 25,000 members across risk contracts, in addition to including non-risk patient equivalent counts as defined by CMS.[2]
- CMS offers risk programs like the Medicare Shared Savings Program for total medical cost of care, as well as Bundled Payments for Care Improvement (BCPI), which covers services that members receive for an episode of care (low back pain, hip fracture, diabetes, etc.).
- In 2021, CMS launched the Global and Professional Direct Contracting (GPDC) Model, which involves providers participating in downside risk.
- Direct contracting between employers and providers has been accomplished by some of the largest employers, such as the Boeing initiative in the Pacific Northwest. However, the hurdles for employers doing this are significant, including claims administration, network development and out-of-area coverage.
This pressure to take more risk means that providers will need reinsurance—sometimes provided through a system-owned, captive insurance company—to smooth their financial results while they are being forced to reduce expensive hospital stays and direct more care to subacute and home care settings.
Many health systems have already established a captive insurance company to retain a portion of risk for hospital professional liability, physician malpractice, cybersecurity or other lines. In such situations, a portion of the PXS risk may be insured through the captive for the following reasons:
- To increase the risk diversity of the captive
- To reduce third-party charges
- To expand market access to reinsurers who are not normally active in the PXS or HMO Re market
In the case of a health system buying PXS, the purchaser will sometimes access a specialized PXS consultant or may leverage its property-casualty (P&C) lines broker to acquire coverage. Frequently, P&C brokers asked to handle such coverage engage a specialist PXS consultant.
PXS coverage should be analyzed to ensure that it matches the delegated risk as closely as possible. Terms are spelled out in the Division of Financial Responsibility (DOFR), which defines who is financially responsible for services rendered. Historically PXS coverage has been confusing, with many inside limits (i.e., inpatient only) designed to meet a price point and manage the moral hazard associated with the ability of the provider to influence the size of the claim. Thankfully, many contracts are becoming simpler now that more providers are taking a global cap (by accepting a defined fixed payment to provide contracted services, the provider assumes all the financial risk for its patients). That said, contracts vary significantly from one payor to another. Some delegate as a percentage of premium, while others delegate on a per-member-per-month (PMPM) basis. Negotiating these contracts is usually done with actuarial support to balance the “data asymmetry” between the payor and provider.
Paying claims can also be complex with the application of unique limitations and coverage terms that may have been negotiated into the coverage. This too has become simpler in recent years as more global risk arrangements have become the preferred risk-share model.
A final note on PXS concerns pricing arbitrage. Some providers are offered embedded provider excess insurance bundled with the managed care contract that delegates risk to them. These contract terms can take away the need for provider excess coverage. It is important to analyze the impact of opting out of these clauses, as some payers build high margins into this coverage. A price check against reinsurance rates can often save the provider money.
Marketplace Dynamics
Writing HMO Re and Provider Excess does add a layer of complexity over and above employer stop-loss. As can be seen from the market characteristics outlined in this article, the list of skills needed to successfully manage the risk is formidable. Here is a partial list:
- Knowledge of government programs and the risks associated with their different managed care payment schemes.
- The ability to negotiate competitive contracts with an array of national and local payers.
- The underwriting ability to detect and assess the risk of a known large claim that could easily overwhelm the premium.
- Actuarial support for pricing and contract negotiation.
- The ability to sell through direct writing, brokers or specialist consultants. (Some carriers market through all three channels, but the majority focus on brokers and specialty consultants.)
- Dealing with cell and gene therapies, which have become a major challenge. The cost of the therapies alone can exceed $2 million, not including the cost of administration. While the results can be curative, the current therapies and pipeline therapies are not included in most rate manuals.
- The ability to support the payor in mitigating large claims. Customers get excited when they see mitigation efforts take hold early—before claims hit the reinsurance layer—since both the carrier and the customer save money. Large claims efforts often target those claims that can turn into catastrophic claims (heart disease, cancer, chronic kidney disease, respiratory failure, transplants, etc.). While the concept is appealing to just about everyone, it is often difficult to get the right people working together on claims mitigation.
Conclusion
While there are risk and statistical similarities among the various types of medical stop-loss products, there are also meaningful differences driven by risks, purchaser needs and distribution channels.
As described in this article, purchasers often employ a number of strategies to save money on medical stop-loss, including:
- Selecting the appropriate deductible or attachment point to avoid trading premium and claims dollars at cost to the purchaser
- Purchasing coverage based on the risk of the entire enterprise as opposed to a small part of the enterprise
- Grouping HMO Re and PXS in a captive insurance company along with traditional P&C coverages like professional liability, physician malpractice, cybersecurity and other risks
- Price checking stop-loss offered in capitation agreements against reinsurance rates
- Finding a carrier that can help the payor mitigate large claims through the buying power of the reinsurer, forensic bill reviews and medical management consultations
- Leveraging outside expertise to purchase a reinsurance program that helps the payor understand this complicated market and meet the purchaser’s objectives
Acknowledgments
The authors wish to thank the following people for sharing their perspectives concerning stop-loss plan operation:
- Greg Demars, FSA, MAAA
- Chris Carlson, FSA, MAAA
- Aaron Grazasko, FSA, MAAA
- Patrick Gallagher, FSA
- Mehb Khoja FSA, MAAA
- Matt Kramer FSA, CERA, MAAA
Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries, the editors, or the respective authors’ employers.
Dave Nelson, FSA, MAAA, is a consultant specializing in health plans and other health care entities at PascoAdvisors. Dave can be reached at Dave@pascoadvisers.com.
Keith Passwater, FSA, MAAA, FCA, is the managing director at PascoAdvisors. Keith can be reached at Keith@pascoadvisors.com.
Peter Robinson is a managing principal at EPIC Insurance Brokers and Consultants. Peter can be reached at peter.robinson@epicbrokers.com.