Would a $5 million dollar claim wreck your health benefits budget?
There are good surprises and there are bad surprises. Having a $5 million or $10 million medical or pharmacy claim hit your plan would not a good surprise, but it could happen. Very large claims are on the rise. In Sun Life’s High-cost claims and injectable drug trends analysis, they found an 8% increase in million dollar-plus claims on a claims-per-million-covered-employees basis over the past year, and a 50% increase over the past four years. In 2023, Sun Life reported a notable increase in the $3 million-plus category: 32 of their members had a claim over $3 million, including nine over $5 million – with the highest claim exceeding $11 million. Half of the $3 million-plus claims were related to congenital anomalies, which can affect an individual’s health throughout their life.
In Mercer’s recent survey of CFOs, one in 10 CFOs with self-funded plans say business results would be materially impacted if actual experience is over budget by less than 2%; with another 3 in 10 saying business results would be materially impacted if actual experience is over budget by 2%-4%. But fewer than half (43%) say they have been warned by their HR department to expect greater volatility in claims experience. If a very big claim hits, the worst-case scenario for HR is if their CFO is taken completely by surprise.
One way that self-funded plan sponsors can protect their medical program budgets from high-cost claims is to purchase stop loss insurance. Historically, some larger companies tended to pass on stop loss; if they had a bad year, they could absorb the additional costs more easily than smaller companies given that a big claim would represent a smaller percentage of the benefit budget. But as big claims have gotten bigger and more frequent, that’s changing. In recent years our annual National Survey of Employer-Sponsored Health Plan has tracked slow but steady growth in the use of stop loss among employers with 5,000 or more employees; today, 68% of self-funded companies of this size purchase stop loss, up from 58% in 2016. This is true even of the largest employers – among those with 20,000 or more employees, essentially half (48%) now use stop loss, up from 32% in 2016.
It’s important to note that stop loss is not a one-size-fits-all product. Employers can align their stop loss coverage levels with both their risk tolerance and the health risk profile of their workforce. Among employers with 500-4,999 employees, the median specific stop loss amount (for claims generated by one individual in one year) is $250,000; among employers with 10,000 or more employees, it’s $725,000. Coverage terms also vary, and it is important to understand what claims are covered by the protection. For example, paying attention to the contract basis is an important element to purchasing stop loss, as short run-in or run-out coverage periods can lead to claim denials. Additionally, the increase in frequency and severity of very large claims is due in large part to increased pharmacy costs. As a result, ensuring pharmacy claims are covered under the stop loss coverage is critical.
In addition to traditional stop loss, there are alternative solutions that may be worth consideration depending on an employer’s situation. For very large employers who do not purchase stop loss today, and are specifically concerned with the future of gene and cell therapies, there are solutions available that will solely cover these risks. Other employers may be interested in evaluating a medical stop loss captive solution, whether it be of the group or single-parent variety. Group captives allow smaller employers to pool risk with other employers, in hopes of smoothing out their experience. Single-parent captives provide an avenue for employers to participate in their own risk by creating their own insurance vehicle, while still securing stop loss protection (reinsurance) over the captive.
Understanding these options and evaluating which may be most appropriate for your company can be complicated. If you have not examined your company’s risk tolerance lately, now is a good time to ask: Would a $5 million-dollar medical claim wreck our budget?
Check out our webinar to learn more about stop loss coverage.
