The level-funding approach to employer medical stop-loss, part 1

Editor’s note: Be sure to read part two in the series. 

Are you thinking about offering a level-funded stop-loss product to employers? Or, perhaps you already have a level-funded offering that has not met your expectations for success. Designing and implementing a level-funded product is complicated and requires many considerations.

Level-funded stop-loss has been an increasingly enticing product for both employers and carriers since the passage of the ACA. Smaller employers with fully-insured medical plans are attracted to the level-funded product’s self-funded features – including lower premium taxes, more control over plan designs, the expectation of sharing in favorable experience, and the access to plan experience data which can be scrutinized for cost containment possibilities.  The percentage of covered workers in small firms (3-199 lives) with a level-funded or self-funded plan grew from 24% to 31% between 2019 and 2020.

Related: Infographic: Trends in self-funded group health plans

As market demand continues to grow, carriers and health plans with fully-insured blocks of business are seeking entry to the level-funded market as a defensive strategy to protect the erosion of their inforce business. Carriers are pursuing this strategy to preserve both premium volume and loss ratios because the fully-insured employers with the most favorable experience make the best candidates for conversion to level-funding. Additionally, health systems that have not traditionally pursued risk with their ASO products are considering a level-funded product offering to expand membership and extend their cost containment services

In this series, we will look at the key components that make a level-funded offering successful. In the first article, I’ll discuss product design, distribution strategy and administration. In the second article, I’ll review underwriting and pricing.

The right product design

The first key component to success is designing your product to optimize profitability and competitiveness.

• Managing surplus. If the employer’s favorable experience leads to a surplus, how much of that surplus will you retain? When will you calculate and pay the settlement? The majority of plans return 50% of surplus three months after the end of the policy period. Most products use terminal liability charges to account for any claims run-out risk after the surplus payout. The structure and timing of these terminal liability charges can be a differentiator given the variety of options for this feature in the market. 

• Drug rebates. The carrier must determine if and how drug rebates will be shared with the employer group. The level-funded product will typically be competing with a fully-insured product where premium rates implicitly reflect the offsetting impact of drug rebates. For level-funding, drug rebate assumptions can be used to lower administrative fees. Alternatively, the claims fund component of the level-funded offering could be lowered to reflect this offset, which decreases the likelihood of a surplus payout 

• Customization of medical and prescription plan design. Increasing flexibility of plan design increases complexity for the employer and could burden an administrator’s operational resources or require restructuring of an administrative platform. However, striking the right balance is important, as increased plan design flexibility and the ability to impact the cost of medical claims are among the selling points for converting an employer from fully-insured.

Expert distribution strategy 

Once you’ve designed your product, you need to make sure that your sales team has the right training and partners. Here are four areas to focus on:

• Activating the right broker channels. The broker should be working in tandem to weed out employers that are not good candidates and to convey how the value of the product is not solely based on price. The broker should be able to highlight that a level funded product allows the employer increased benefit plan design flexibility, provides the employer with more information on cost drivers and can result in long-term savings. Additionally, the broker should be able to provide insight into whether the employer is genuinely eager to take a more active role in managing benefits and encouraging employees to improve how they access and utilize medical benefits. 

• Recognizing which employers are a good fit. Distribution screening of quotes is essential for maintaining underwriting efficiency. Level-funded conversions are particularly susceptible to the low closing ratios associated with employers and brokers requesting quotes solely as a mechanism to drive down renewal rates. 

• Equipping the sales team for success. While many product design features such as surplus percent or settlement timing may be similar across carriers, understanding any differences in features that impact the employer’s overall cost – terminal liability, refund of prescription rebates, cost containment programs, etc. – is key to differentiating the product in the marketplace.

• Understanding the mechanics of level-funding. The level-funded product is often considered competitive when the maximum liability is 10% higher than the fully-insured premium. If the distribution team is accustomed to selling products based solely on price, they may struggle to convey the value to the employer. The sales team needs the skills and tools for conveying the long-term value of level-funding, explaining how an employer can win after multiple years of outperforming expected.

Robust administrative platform

As sales begin to materialize, will the administrative platform be able to efficiently accommodate the features of level-funding? It is essential to assess administrative capabilities before embarking on a level-funding implementation. Many administration platforms are segregated to accommodate fully-insured versus self-funded features. Because the level-funded product includes hybrid features, determining which platform is superior for accommodating the product can be complicated. 

The administrative platform should be able to:

• produce proposals which include all of the components of level-funding with stop-loss (claims fund, administration fees, stop-loss deductible thresholds and rates, etc.)
• bill and reconcile stop-loss premium
• create a surplus calculation which includes refund, terminal liability, and reporting of individual and aggregate stop-loss claim liability
• report monthly group settlements
• support online enrollment, billing and reporting through an employer-accessed portal

Conclusion

As you can see, there are many considerations for a successful level-funded offering. In this installment, I outlined the importance of product design, distribution and administration. However, you can’t have a successful offering without the right strategies for pricing and underwriting, which I will cover in the next installment in this series.

Renee Shiller is Head of Stop-Loss Solutions for FullscopeRMS.