Introduction
63% of covered US workers are enrolled in a self-funded health plan, according to the 2024 Kaiser Permanente Employer Health Benefits Survey. This includes 61% of covered workers at firms with 200 to 999 employees as well as a full 20% of workers at firms under 200 employees.
Although largely self-funded, many smaller employers do not have the financial ability to comfortably absorb significant individual medical claims. At the same time, the trend in the financial cost of medical treatments is increasing, and there is a proliferation of high-cost treatments—such as gene and cell therapy— in development.
For this reason, employers (particularly smaller employers) buy medical stop loss insurance to protect their self-funded plans. However, what happens when there’s a known high-cost medical condition in the employer’s population and the stop loss program is coming up for renewal?
Lasers
It’s a dreaded word for many self-funded employers, but the answer to the above question in most cases is that the stop loss carrier will impose a “laser.”
What is a laser?
A laser isolates a specific individual in the employer’s population and imposes a higher specific deductible on that individual. The higher deductible is an estimate of the treatment costs in the coming year for that employee’s (or dependent’s) known medical condition. The amount of the laser is usually determined by a medical review.
A laser is a higher deductible imposed on an individual with a known medical condition.
Example
Assume a 300-life employer group has a $150,000 specific stop loss deductible. Now, consider an individual in the group is currently being treated for cancer, with an expected treatment cost of $500,000 for the upcoming plan year. Medical stop loss coverage with a $150,000 specific deductible is issued to the employer for each covered individual except for the cancer patient, who will be “lasered” with a $500,000 specific deductible. The employer picks up an additional $350,000 in potential costs for that individual (i.e., the difference between the laser and the baseline specific deductible under the stop loss policy).
How To Manage a Laser (or High-Cost Claimant)
Even if the carrier were willing to do this, it would not be a financially efficient structure. Premiums include administrative expenses and insurer profit. Paying for known costs through premiums just inflates the total amount paid for the cost of treatment. In addition, stop loss premiums (or, indeed, health insurance premiums in general) rarely come down. Building more premium into a renewal is likely to inflate overall stop loss costs in the future.
Include Known Costs in the Premium
Even if the carrier was willing to do this, it would not be a financially efficient structure. Premiums include administrative expenses and insurer profit. Paying for known costs through premium just inflates the amount you are going to pay for the cost of treatment. In addition, stop loss premiums or health insurance premiums in general rarely come down. Building more premium into a renewal is likely to inflate the stop loss costs into the future.
Paying for known costs through insurance premiums adds frictional cost.
Include a No New Laser Provision
This is the more realistic option over including known high costs in the premium. A No New Laser (NNL) provision states the carrier will not impose a new laser at renewal. This overcomes the problem of the cost of a high-cost claimant being transferred back to the employer once the contract is renewed.
An NNL provision comes with a premium surcharge, which may be in the 10 to 15% range annually. There will also likely be an increased premium at renewal (to absorb the additional cost of the treatment the carrier will now bear). To mitigate the increase in premium at renewal, NNL provisions are usually accompanied by a rate cap, which may be in the 30 to 50% range.
The No New Laser rate cap (NNLRC) provision has become standard in the market as a means of approaching the additional costs associated with high-cost claimants. While an NNLRC aims to address the problem of lasering, there are several downsides including:
No new laser rate caps typically add 10-15% in premiums annually.
- Premium increases: By selecting an NNLRC, you are accepting premium increases upon renewal and throughout the following year (up to the rate cap). As outlined above, paying for known events through insurance premiums is not an efficient financing mechanism, as it builds in additional expenses and insurer profit.
- The financial cost of the condition may be less than the laser: The premium surcharge in the NNLRC is immediate, yet the exact treatment costs of the individual are unknown. These costs may not occur, the employee could leave the plan, or the costs could be significantly less. Yet in all these situations, the employer would still pay the premium surcharge for the NNLRC.
- Non-renewal: The medical stop loss contract is an annual contract. There is no guaranteed renewal. If the costs are going to exceed the rate cap, the carrier still has the option not to renew. The rate cap could be seen as the threshold at which the carrier would non-renew. And if this were to happen, going into the market with a high-cost claimant would be difficult for the employer.
Structure as a Conditional Laser
Some carriers are willing to structure the laser as conditional. Under a conditional laser, the higher (lasered) deductible is only applied if the individual undergoes treatment for the specified condition during the contract period. If the treatment is delayed or an alternative course of treatment is followed, the laser is not applied.
Accept the Laser
While this would seem to put the most financial strain on the employer, it may also be the most cost-effective way to handle a high-cost claimant. It puts the obligation and incentive on the employer to manage the cost of the claim. If the employer can manage the cost at a level that’s less than the laser, there will be a direct saving in that year. (This management can often be achieved through Centers of Excellence and cost-containment vendors, who may get reduced rates for a specified treatment.) As with the conditional laser, if the treatment is not completed within the year—or an alternative course of treatment is followed—the employer will pay lower costs. This approach avoids the premium surcharge and the likely increase at renewal through subsequent years.
Captives and Lasers
The above options for managing lasers are applicable to traditional stop loss programs.
For those employers in captive programs, there are additional considerations around the sharing of risk among participating employers as well as around the potential to create adverse risk selection in the pool. The captive does play a role in smoothing out experience and can be used as a shock absorber for some (or all) of the laser. However, the strategy for managing lasers within the captive needs to be clearly laid out and understood by the participating employers.
For example, the captive may have a strategy to develop a laser pool to meet the cost of high-cost claimants, and the source of funding for the laser pool may be from prior-year surplus. The captive’s stated strategy in this case would be to retain funds to meet the costs of high-cost claimants, rather than distribute surplus back to participating employers. Alternatively, the captive may absorb a portion of the laser to spread among participating employers while requiring the “lasered” employer to absorb some of the laser as well. This maintains an incentive for the lasered employer to manage the costs of the specified treatment.
In group captives, NNLRC provisions can create adverse risk selection problems.
As discussed in our article NNLRC and Adverse Risk Selection, blanket application of an NNLRC provision in a captive not only drives up premium, it also creates adverse risk selection and can lead to a potential downward spiral in the performance of the captive.
Conclusion
The uncertainty around medical conditions is not well suited to annually renewable insurance contracts. Once a condition presents itself, why would the carrier renew the contract… or renew the contract on the same terms? The stop loss industry has tried to manage this problem through lasering, as well as by providing more certainty through NNLRC provisions. There are benefits to both approaches, but neither is perfect. Managing the costs of the high-cost claimant directly is likely to be the most cost-effective approach for the employer. Participating in a well-structured group captive may also help smooth out some of the immediate costs.