The level-funding approach to employer medical stop-loss, part 2: considerations for a successful offering

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.

Since the passage of the ACA, level-funded stop-loss has been an increasingly enticing product for both employers and carriers. 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.

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.

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

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

Underwriting and risk management expertise

Once you have determined your sales and product offering strategy, underwriting expertise will become the most important differentiator for success in a level-funded product. Here are some questions to ask as you develop this competency: 

• When historical claims experience is not available or credible, how will the underwriting team identify good risks? Should medical risk assessments use group or individual health questionnaires? Factors to consider with medical risk assessments include understanding whether the market will accommodate more detailed questionnaires. Additionally, the gain associated with receiving more detailed information in an individual questionnaire will need to overcome the time and expertise required to process these questionnaires. For group questionnaires, employer size impacts the quality of the information, as larger employers are less apt to know about the health of the individual employees and their dependents. 

• Can predictive modeling tools be beneficial? The most common predictive modeling tool in the industry matches employees from a census with a large prescription drug claims database. This can help the underwriting team assess whether a group has high utilization or certain ongoing medical conditions. However, it will not capture the risk associated with some of the highest cost conditions where the drugs are administered in an in- or out-patient setting. 

• Does the underwriting team have the expertise to identify the best groups to target for conversion? Given the lack of credible data, underwriting experience is essential for balancing the subjective pieces of information about an employer. Underwriters must be able to determine and weigh many factors, including the group’s propensity to switch carriers, their historical rate increases, employee participation in the plan, employer contribution percentage for dependents, COBRA participation percentage, etc.

The right pricing strategy 

In tandem with product design, there are several considerations that will impact the pricing of the offering.

• Balancing cost against claims. Conservatively pricing the stop-loss and aggressively pricing the claims fund reduces the likelihood that an employer will generate a surplus, which could lead to a flight back to fully-insured. When pricing the product, the durational impact of improved persistency associated with the employers’ refund expectations should be considered. 

• Target employer size. When the product first gained popularity in the market, most level-funded offerings were focused on employers in the 50-100 life range – employers small enough to shy away from the cash flow and claims volatility risk associated with a traditional stop-loss product, but large enough to generate the premium needed to offset per-case expenses associated with underwriting. However, the market has been expanding on both ends of the range, with some carriers willing to write employers down to four lives, and some pursuing groups as large as 250 or 300 lives. The main considerations for determining target market are the cost of underwriting very small groups (particularly if individual health questionnaires are involved), state regulations which limit size, aggregate stop-loss corridors and/or specific stop-loss deductibles, and the balance of the costs and benefits of the various alternative methods for evaluating risk when claims experience data is limited or unavailable. 

• Target conversion opportunities. If you have a fully-insured book of business, how much of the block will you target for conversion? Employer groups with the best risk profiles are the prime candidates for the level-funded product and will likely be a target for competitors. The strategy for targeting conversions within an existing fully-insured block should consider the aggressiveness of the competitive marketplace and the modeling of loss ratio expectations, including any ACA risk adjustments that could compensate for moving the best performing groups off of fully-insured. 

Conclusion

While employer medical stop-loss is a traditional way for companies to control health care costs, a level-funded approach is becoming a more popular solution to help companies manage consistent cash flow month to month. However, level-funded is a specialized offering, with many considerations to make it successful for those companies offering this solution and their clients.

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