Stop Loss 201

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Stop Loss 201

• Date, Presenter

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• Welcome to Stop Loss 201

• Important Reminders Before We Begin
• Thank you for coming!
• Please sign roster now, and fill out all
  information
• This is the Stop Loss 201 course for two credits
• You must be present for entire course to earn
  credits
• Sales and Internal Company Procedures cannot be
  used for CE credit
• Here is the course outline
• Lets begin!

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Stop Loss 201

• Presented By
• Title
• Experience
• Education/License

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STOP LOSS 201 - AGENDA

• Stop Loss Review
• Why Do Customers Need Stop Loss?
• Stop Loss Products
• Marketplace Review
• Firm vs. Contingent Quote
• Value of Integration
• Premium Stop Loss Products
• Trend
• Catastrophic Trend
• Major Stop Loss Drivers
• Leveraged Trend and Differences by Pooling Level
• Suggested Pooling Levels
• Volatility
• Capital Requirements
• Years Between the BIG Claim
• Credibility
• Experience Rated vs. Pooled Methodology
• Conclusion and Case Study

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Why Stop Loss
Why Stop Loss

• Stop Loss Customers Include
• Self-insured (ASO), mid-sized customers
• Customers moving from insured to ASO plans
• National account customers who are risk averse
  or have smaller
  
  
  
  cost centers structured under the
  parent company
• What do Stop Loss products provide?
• Sleep insurance
• Protection from the impact of high dollar
• claims on their cash flow experience
• A level of predictability for medical
• claim expenditures

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Stop Loss Products
Stop Loss Products

• Individual Stop Loss (ISL) Definition/Concepts
• Written with ASO plans in conjunction with an
  underlying medical plan
• Protects an employers financial resources from
  large claims on any one individual.
• Customers liability is capped at a certain
  dollar amount on each individual per policy year.
• Amounts below the pooling point are the
  customers liability
• Amounts above the pooling point are the Carriers
  liability
• Claims over the pooling point for an individual
  member are removed from the customers experience
  paid by the stop loss pool.

Pooling Point 100,000 Pooling Point 100,000 Pooling Point 100,000 Pooling Point 100,000
Total Claims Customer Liability Stop Loss Carrier Liability
Individual 1 150,000 100,000 50,000
Individual 2 1,000,000 100,000 900,000
Individual 3 275,000 100,000 175,000
Total 1,425,000 300,000 1,125,000
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Stop Loss Products
Stop Loss Products

• Aggregate Stop Loss (ASL) Definition/Concepts
• Aggregate Stop Loss limits the ASO customers
  overall claim experience for a policy year.
• The customers liability is usually expressed in
  terms of a percentage of total expected claims.
  Typically this is 125 but can vary based on
  customer need.
• All claims up to this threshold are the
  customers liability, all amounts over are the
  Stop Loss Carriers liability.
• In most cases, ISL coverage must also be
  purchased. In some instances, an implied ISL
  level can be used as an alternative.
• Amounts paid by the employer, below the
  individual stop loss pooling point, accumulate
  towards the ASL threshold.

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Stop Loss Products
Stop Loss Products

• Individual Stop Loss Aggregate Stop Loss
  Contract Types
• New Business Contracts are labeled according to
  (1) how claims are incurred and paid and (2) how
  they accumulate to the pooling point. The first
  number refers to the incurral period and the
  second number to the paid period.
• 12/12 (incurred in 12 / paid in 12) Standard
  first year option
• Run In Contracts 15/12, 18/12, 24/12. Only
  available in first year.
• Run Out Contracts 12/15, 12/18, 12/24. Applies
  to termination year only.
• Renewal Contracts can renew on a rolling basis
  or a paid basis. A paid contract includes all
  claims incurred after the policy effective date
  (while the contract is in effect) toward the
  pooling point in the year in which they are paid.
• Rolling Contract i.e. Rolling 12/15 (incurred in
  12 / paid in 15)
• Incurred Contract 12/36 - Accumulates claims
  toward the pooling point based on the year the
  claims were incurred, rather than the year they
  were paid matching employer liability

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Players in the Market
Players in the Market

• Managing General Underwriters
• A group of our stop loss competitors who
  underwrite, act as a gatekeeper for carrier
  selection and claims administration, select
  reinsurance brokers to quote the business and
  eventually assign the business to selected
  carriers.
• MGUs assess risk, but do not retain it.
• Direct / 3rd Party Carriers
• A group of our stop loss competitors who provide
  stop loss coverage but do not administer the
  customers medical benefit plan.
• Integrated Carriers
• A group of stop loss providers that administer
  both the medical and provide stop loss coverage.

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Players in the Market
Players in the Market
Common MGU / Direct Carrier Practices

• Strict disclosure on both new business renewals
• Contingent Quote no firm quotes until 30 days
  before the effective date
• Lasers often required
• Gaps in coverage (limitations, exclusions,
  maximums in Stop Loss policy that are different
  from the medical plan)
• Conservative contract constraints
• Strict claim submission requirements
• According to the 2007 Towers Perrin Stop Loss
  Survey close ratios on new business were 3.4 and
  retention rates were 68

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Disclosure Reporting
Disclosure Reporting

• The practice whereby a carrier requires
  completion of a disclosure
• form signing off on all known and emerging
  claims.
• Sources for completing the form include
  pre-certification information, case management
  notes, utilization review and claim files.
  Required information includes
• Diagnosis
• Current/Planned treatment patterns
• Prognosis
• Signature of an officer of the company

Information disclosed can be used to justify
re-rating and failure to provide complete
disclosure may result in claim denial.
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The Risk of a Contingent Quote

• Common practice among third party carriers is to
  issue quotes on an illustrative basis
• Updated claim information is required 15 45
  days prior to the effective date
• Based on updated information TPC may re-rate or
  laser any emerging claims. On average, 10 of
  cases are re-rated based on updated claims
  experience.
• Customer and Broker are left with unexpected
  changes on or about the effective date
• The smaller employer groups are least likely to
  afford the risk of a contingent quote due to
  these risks

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Firm vs. Contingent Quote

• Company XYZ has 200 employees
• Employers expected annual healthcare costs are
  600K, (500K medical, 100K Stop Loss premium)
• Just prior to renewal, an early stage transplant
  patient develops on the plan with an expected
  cost of 300K
• If this customer had a firm quote their costs
  would remain at 600K
• With a contingent quote, costs would increase to
  900K, (500K medical, 400K Stop Loss premium),
  a 50 increase!

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The Value of Integration
The Value of Integration

• Comprehensive Coverage Integration
• Consistent with underlying medical plan in terms
  of limitations, exclusions and maximums.
• Consistent standards for medical necessity,
  claims review and payment
• Ease of Administration
• Single point of contact
• Faster reimbursements
• Additional claim audit
• Timely notifications and reporting
• Typically no claim filing requirements
• Plus
• Sensitive data remains with the medical carrier
  instead of being distributed to multiple parties
• Accountability
• Risk Retention

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Premium Stop Loss Products
Premium Stop Loss Products
Incurred Accumulation Option (12/36)

• Accumulates claims toward the pooling point based
  on the year the claims were incurred, rather than
  the year they were paid matching employer
  liability.
• Once an individual hits the pooling point in a
  given year, all other claims incurred by that
  individual within the year (paid within the 36
  month paid period) will be covered.
• Eliminates the need for separate Run Out or Run
  In protection in the future eliminates the
  first year maturation adjustment.
• Example ABC Company has elected Incurred
  Accumulation with a 1/1/08 effective date. All
  claims incurred in 2008, paid by 12/31/10, will
  be grouped together for purposes of comparison to
  the pooling point. At renewal, all claims
  incurred in 2009, paid by 12/31/11, will be
  grouped together.

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Premium Stop Loss Products
Premium Stop Loss Products
Guarantee of Insurability
Mature Example with Known Claimants at
Renewal Lives 800 Lives Pooling Point
100,000 Contract Basis 15/12
(mature) Claimants No
high dollar claimants at presale 2 claimants at
250,000 each at renewal
With
RP Option Without RP Option Difference
Year 1 Pooling at 100,000
Rate

50.00 50.00 0 High
Claimant Adjustment
0 0 0
Renewal Planner Adjustment
5.00 0
(5.00) Total Rate
55.00
50.00 (5.00)
Annual Premium
528,000.00 480,000.00
(48,000) Year 2 Pooling at 110,000

Rate
54.00
54.00 0 High Claimant Adjustment
0
30.00 30.00 SubTotal
54.00 84.00 30.00 Renewal
Planner Adjustment 4.50
0
(4.50) Total Rate
58.50
84.00 25.50 Annual Premium
561,600.00
806,400.00 244,800
Rate assumes 8 medical increase If sold as
immature, the rate would have been adjusted for
maturation. If no PPT increase, addtl
adjustment for leveraged trend.
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Impacting the Rate Contract Nuances
Premium No Gap Coverage Buy Down Options
Quote Terms Firm quote Contingent quote
Lasering No lasers applied Lasers applied to known claimants
Maximums Mirror medical plan Separate maximum applied
Run In Cap Unlimited maximum Maximum applied
Contract Type Paid Rolling
Pharmacy Included Excluded
Potential Gaps in Buy Down Coverage
Last minute re-rating
Additional customer liability between case PPT and laser
Additional customer liability over applied maximum
Additional customer liability over applied maximum
Year-to-year protection
May reduce reimbursement amount on high claimants and may reduce the number of claimants eligible for reimbursement
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Trend

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Catastrophic Claim Drivers
Catastrophic Claim Drivers
The frequency of jumbo claims is defined as a
member incurring medical claims of 1 million or
more in a year, increased ten-fold from the year
2000 to 2005, from less than 1/10th of one member
per 100,000 health plan members to 1.1 per
100,000 members in 2005

• Common drivers for catastrophic claims include
• Neonatal Care
• Cancer Treatment and Care
• Trauma / Burn Victims
• Severe Cardiovascular conditions
• Transplants
• Hemophilia and Genetic Disorders (Multiple
  Sclerosis)
• Specialty Drugs and Therapies

Source Evergreen Re study published in the
9/16/07 MyHealthGuide Newsletter
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Stop Loss Claim Drivers by Pooling Level

• As the pooling level increases the drivers of
  Stop Loss Claims change
• NICU costs drive a much greater percentage of
  overall stop loss claims as the pooling point
  increases

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Catastrophic Claim Drivers
Catastrophic Claim Drivers

• Inpatient expenses drive 60 of all Stop Loss
  claim costs
• With the effect of leveraged trend the increase
  of inpatient costs for stop loss claims is
  between 12 and 24
• An example of a catastrophic inpatient claim is
  premature births
• Inpatient costs can drive as much as 70 - 80
  of all stop loss claims as the pooling point
  increases

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Catastrophic Claim Drivers
Catastrophic Claim Drivers
Premature Births

• According to the March of Dimes, most pregnancies
  last around 40 weeks. Babies born between 37 and
  42 completed weeks of pregnancy are called full
  term. Babies born before 37 completed weeks of
  pregnancy are called premature.
• About 12.5 percent of babies (more than half a
  million a year) in the United States are born
  prematurely
• (1). For reasons that doctors don't fully
  understand, the rate of premature birth has
  increased by more than 30 percent since 1981 (1).
  
• Premature birth is a serious health problem.
• Premature babies are at increased risk for
  newborn health complications, as well as lasting
  disabilities, such as mental retardation,
  cerebral palsy, lung and gastrointestinal
  problems, vision and hearing loss, and even
  death.
• Many premature babies require care in a neonatal
  intensive care unit (NICU), which has specialized
  medical staff and equipment that can deal with
  the multiple problems faced by premature infants.
• NICU Costs represent 35 of all stop loss claims
  gt 500K

1. Martin, J.A., et al. Births Final Data for
2004. National Vital Statistics Reports, volume
55, number 1, September 29, 2006.
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Facility Differences

• Contracting arrangements with local Hospital
  drives a portion of Stop Loss rates
• Hospital average cost per day
• The average cost per day for hospital admissions
  is between 3,000 and 3,500
• The average non-catastrophic cost per day is
  about 2,000
• Average catastrophic cost per day is about 6,000
  and can be as high as 12,000 - 15,000 per day

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Facility Differences

• Hospital costs increase each year but the
  increases vary by facility type
• The average trend at a Community Hospital is
  about 5
• The average trend at Tertiary and Teaching
  Hospitals is about 8

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Catastrophic Claim Drivers
Catastrophic Claim Drivers

• Outpatient services drive 20 of all Stop Loss
  claim costs
• With the effect of leveraged trend the increase
  of outpatient
• costs for stop loss claims is between 12 and 24
• An example of a catastrophic outpatient service
  is a cancer diagnoses receiving chemotherapy.
  Members in this treatment regiment can range from
  50K - 150K in the majority of cases. In cases
  where cancer has spread to multiple organs it is
  not unusual to see claims in excess of 250K

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Catastrophic Claim Drivers
Catastrophic Claim Drivers

• High cost Drugs represent 10 of stop loss
  claims on average
• These drugs can run as high as 3 million for
  individualized cancer therapies. Given the highly
  individualized nature of certain high cost drugs,
  these drugs are produced on a as needed basis
  with minimal manufactures to help control cost
• In 2004, high cost drugs represented only 4 of
  total stop loss claims vs. 10 today
• A hemophilia patient receiving factor
  replacement can quickly increase significantly if
  a claimant develops antibodies and requires
  greater than normal factor 8 replacement doses

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Leveraged Trend
Stop Loss Carrier Cost increases 20
Customer Cost is Flat
Assume that in your current year, the plan has a
75,000 pooling point and there is one employee
with a 150,000 claim. The customer funds the
first 75,000 and the stop loss carrier funds the
remaining 75,000. If medical trend is 10, the
same 150,000 claim would increase to 165,000 in
the following year. The customer would still
fund the first 75,000 but the stop loss carrier
would pay 90,000 an increase of 20 In
addition, a 75,000 claim (which does not hit the
pooling point in the current year) becomes a
82,500 claim in the following year and the stop
loss carrier is liable for claims it didnt have
to cover at all the year before
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Leveraged Trend Effect on Pooled and Unpooled
Claims

• The example above looks at a 10 claim trend over
  a 4 year period
• The overall pool increases 10 each year
• The Stop Loss Carrier covers a greater percentage
  each year while the unpooled percentage will
  actually decrease
• As you can see in the graph below the pooled
  claim dollars will expand at a higher pace when
  compared with the unpooled if no changes are made
  to the pooling level

Pooled vs. Unpooled Claim Trend
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Leveraged Trend
Leveraged Trend

• Leverage Trend is not a number, rather its a
  range of numbers
• Lower Pooling levels have leveraged trend as low
  as 12 14
• Higher Pooling levels have leveraged trend as
  high as 30 40
• The reason for this differential is the effect of
  deductible leveraging

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Increased Pooling Level Impact
Increased Pooling Level Impact
The best way to control leveraged trend is
through increasing the pooling level. There is
always a concern about the additional risk driven
by the increase in pooling level. While it does
increase customer liability, it may be more cost
effective to do this than to receive an increase
in premium to maintain the lower pooling point.
For most health plans, a 10 increase in
pooling level doesn't impact the overall risk for
the health plan by much. As a result, a strategy
of consistent increases in line with medical
trend to the pooling level each year is most
practical.
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Example Pooling Level Impact
Example - Pooling Level Impact
Exhibit I below looks at the effect of raising
the pooling level each year in line with medical
trend (estimated at 10 in the example). The
premium savings generated in this example is
133,650, the question becomes is it worth the
additional risk?
Exhibit I
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Example Pooling Level Impact
Example - Pooling Level Impact
Exhibit II below shows the effect on claim
payments of the annual increase in pooling level.
If we assume 1 claimant each year with a base
of 100,000 this customer would end up with over
50,000 of savings during the 5 year period.
Exhibit II
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Sample Renewal Rate Reductions

• Changes in the pooling point will reduce fixed
  premium costs
• As shown in the chart above for customers with
  mature claim experience and a pooling level of
  75,000 a 10,000 increase in pooling level will
  reduce their stop loss premium by 11 19
• For customers with a pooling point over 200,000
  a 25,000 increase in pooling level will lower
  rates by up to 25
• By increasing the pooling point customers will
  reduce stop loss premiums and also save on
  premium tax

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Recommended Pooling Levels

• Although each employer will have their own risk
  threshold we do have recommend pooling levels by
  employer size
• Key is to balance stop loss ISL costs with the
  customers risk
• Keep risk threshold consistent each year by
  increasing the pooling point in line with medical
  trend
• The chart below represents recommended pooling
  levels for a variety of employer sizes
• Assumption is 6K PEPY in annual claim costs
• The target pooling point and ranges should
  increase about 10 per year

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Summary Pooling Point Guidance

• 3 Actions to Mitigate the Renewal Rate Increase
• Eliminate the Maturation Adjustment on First Year
  Business
• Purchasing a Run In or Run Out contract in the
  first year eliminates the second year maturity
  adjustment. Another option is to sell on a
  mature contract basis.
• Mitigate the Effect of Leveraged Trend
• Pooling points should increase annually to
  mitigate the effects of leveraged trend
• Eliminate Adjustments for Ongoing Claims
• Adjustments for ongoing claims can be eliminated
  with products designed to guarantee a level of
  predictability for renewal rates

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Volatility

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Capital Requirements / Government Regulation

• Capital requirements and government regulations
  drive much of the cost in the stop loss
  marketplace
• Based on the rating of the Stop Loss Carrier and
  state insurance department regulations 40 - 55
  of every dollar of revenue is required to be
  allocated to reserves.
• Each state has specific filing requirements which
  drives higher administrative fees
• Premium Tax
• Some states levy special assessments for
  uninsured residents
• Consequently the industry prices to a 68 loss
  ratio

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Predicted Loss Ratio

• Past loss ratio experience is not credible
  ongoing claims have higher credibility and
  present selection risk
• Typical Loss Ratio experience shows that a case
  has a 1 and 4 chance of falling into each of the
  following loss ratio buckets

Loss Ratio Percent of Cases
0 25
0-40 25
40-100 25
100 or more 25
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Average Number of Years Between the Big Claim

• The overall stop loss pool increases by leveraged
  trend annually
• Some clients will look at their three or four
  years of experience, and expect a rate pass for
  good experience
• How good would their experience be if they were
  the one with the really big claim?
• The chart shows how often, on average, a client
  should expect to be the one with the really big
  claim

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Expected of High Claimants

• Based on a 2,500 life group the above example
  shows the expected number of claimants that would
  exceed a pooling level of 100,000
• The expectation is this customer would have 2
  members above the pooling level in 2001
• If the same pooling level is retained, the
  number of members exceeding the pooling level
  would grow exponentially over the years

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Expected Claims by Pooling Level

• Based on prior claim experience we can predict
  the number of claimants a group will have by
  pooling level
• As a customer increases their pooling point the
  risk of members reaching the pooling level
  decreases which will translate to lower stop loss
  premiums

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Pooled Risk vs. Known Risk

• Overall, stop loss experience is pooled to obtain
  a manual rate
• An individual employer groups demographics and
  geographic location will drive an adjustment to
  the manual rate
• Known claimants would be factored into the
  premium through either a claim load or laser
• If there are no known risks in the population the
  employer group may receive a reduction in their
  rates
• When obtaining a contingent stop loss rate an
  employer is taking a risk on potential high
  dollar claimants developing after their initial
  rate quote
• An example of this is a customer that has
  favorable demographics and geography and receives
  a favorable reduction in their manual rate
• However, If the employer does not get a firm
  quote they will be subject to being underwritten
  again within 30 days of the policies inception
• Should a potential claimant over the pooling
  level develop, it would result in a increase in
  the rate or a Laser on that member
• The frequency of known claimants developing later
  in the year is about 20

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Lifetime Max and HRA / HSA Plans

• Policy and lifetime maximums
• With no separate maximum there is full coverage
  of eligible claims paid under the benefit plan
• Many specialty carriers standardly quote a
  maximum on ISL and ASL
• Unexpected risk can be catastrophic eliminating
  the protection the employer was expecting
• Effect on rates with a H R A / H S A
• Effect on stop loss rates is minimal
• Claim pick will change slightly
• Largest impact is an increase to out of pocket
  maximums
• Minimal effect in the short term but may reduce
  future claim risk

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Value of Provider Network and Transplant Contracts

• According to a 2006 study by Milliman, the
  average organ transplant costs 328,000 and can
  rise dramatically with complications
• Transplant coverage is included in the underlying
  plan with most Integrated carriers
• Case management is consistent throughout member
  treatment
• Negotiating power of integrated carriers can lead
  to lower overall costs for employers
• Some employers purchase carve out transplant
  services which require members to use a different
  network
• Contract language can restrict members to only
  one transplant which could shift liability back
  to the employer
• Restrictive language can eliminate payment and
  leave the employer at risk

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Case Management Notes

• Release of Case Management Notes
• Carriers will provide the succeeding carrier
  information, at the customers request, once
• signed agreements are in place to ensure that
  personal health information (PHI) is disclosed
• appropriately. The following information is
  normally released, at the customers request
• Member name, address, social security number, and
  relationship to the account subscriber
• Diagnosis (for ASO accounts only)
• Hospital name (if patient is currently in
  hospital, for ASO accounts only)
• Servicing provider information (name, specialty,
  address, for ASO accounts only)
• Prognosis information is not provided. 
• This information is subjective in nature and does
  not take into consideration how individuals
  respond to care plans 
• Most carriers will not project which members may
  incur claims who will exceed the pooling point,
  including projected members on transplant lists,
  in case management or diagnosed with specific
  illnesses that may exceed the pooling point 
• These projections are subjective and may be
  inaccurate due to the unpredictability of how
  individuals may respond to specific illness or
  conditions

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Case Study - Handout

• Lets put it all together
• Sample Case
• Large Retailer
• 1,000 Employees / 2,000 Members
• Demographic Factor of .90
• 53 Female
• 47 Single
• 21 Married
• 32 Family
• Main Locations in Texas
• Current Pooling Point 150K
• Paid Contract 48 / 12
• Medical Trend 8

Leveraged Trend
Pooling Point
Risk Threshold
Volatility
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Case Study

• You are the current benefits consultant for an
  employer who has 1,000 employees.
• They are in the process of renewing their
  individual stop loss policy for the upcoming
• policy year. The employer has asked for your
  expertise in understanding what to
• expect for their upcoming stop loss renewal.

• 1. The employer is interested in helping to
  control fixed costs, and would like a
  recommendation on what pooling level makes the
  most sense for their health plan. The current
  individual stop loss pooling level is 150K.
  Which of the following would you recommend, and
  why?

1. 150K
2. 165K
3. 175K
4. 200K

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Case Study

• 2. Assuming the employer implements your
  recommendation in the previous question regarding
  pooling level, what level of increase in their
  stop loss rates should this employer expect in
  their renewal?

1. -18
2. -10
3. 2
4. 15

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Case Study
3. When looking at their stop loss renewal, the
employer has noticed the fact that theyve had
individual stop loss coverage for 5 years, and
havent had a claim greater than 500K. As a
result, the employer would like to know why their
stop loss premium continues to be high given that
they havent had any significant large claims.
As the consultant for this employer, whats the
most likely explanation for why this may be
occurring?

1. Stop loss is a pooled product
2. Catastrophic claims arent credible enough to
   experience rate a group of this size
3. Considering that a group of 1000 employees is
   likely to have a claim greater than 500K once
   every 6 years, this groups experience is
   actually fairly normal when compared with the
   actuarial expected value of large claims
4. All of the above

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Case Study
4. The benefit manager has been networking with
peers from other companies and has been informed
that if they go with XYZ Stop Loss Insurer, they
could save 10 in fixed costs versus their
current stop loss contract. They are also aware
that XYZ Stop Loss Insurer requires disclosure,
while their current stop loss carrier has offered
a firm renewal 4 months in advance of their
policy effective date. The employer has come to
you for advice. Which of the following
recommendations best describes the current
situation?

1. Its in the employers best interest to move the
   stop loss business to company XYZ, as 10 savings
   is a lot of money and likely to be a better deal
   for the employer.
2. Its something the employer can consider as an
   alternative, though theres a reason why the stop
   loss rates for XYZ Stop Loss Insurer are 10
   lower, and its driven by disclosure and the
   option to laser or deny claims, which would
   otherwise be covered under a firm renewal.
3. From prior experience, company XYZ has never
   re-rated an account based on disclosure, so its
   not something the employer should be concerned
   about.

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Questions

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Next Steps

• Before you leave, please make sure youve
  completely filled out and signed the roster-
  include all information
• Print legibly and include your full name, work
  address, work telephone number, name of company
• Complete the evaluation form
• You should receive your certificate within three
  weeks
• Thank you!