Is There a Place in My Captive for
Employer Medical Stop Loss?
Lauree Barreca, The Johns Hopkins Health System
Eric Melchior, Greater Baltimore Medical Center
Kevin Carnell, RCM&D
Dana Serafin Cary, RCM&D
Medical Stop Loss
2
• A form of insurance that employers purchase to limit
their losses when self-funding their employee’s health plan
• Two Forms:
• Specific Stop Loss
• Aggregate Stop Loss
Specific Stop Loss
3
• Insures against a single catastrophic claim that exceeds a
dollar limit – the specific deductible
• Protects against large individual claims
• Claim must be paid within a specific period of
time
• Specific deductible determined by size of
employer or as percentage of the expected paid
claim
Aggregate Stop Loss
4
• Insures against total claims exceeding an estimated
dollar amount plus a margin during the plan year
• Limits total financial liability of the plan
• Margin is typically 125 to 150% of expected claims,
depending on size of health plan
• Usually offered with Specific Stop Loss
Commercial Market Issues
5
• Target loss ratio is 60 to 75%
• Premium is volatile
• Rates immediately reflect recent claims history
• No “smoothing” of risk transfer costs
• The employer stop loss market is hardening
• The removal of plan maximums
• Ever increasing large claims (medical inflation)
• Coverage with “reasonable” retentions are
“unreasonably” priced
Medical Stop Loss through a Captive
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• Allows employer to control more of the risk and cost of self-insuring
medical benefits:
• The captive provides a mechanism to spread the risk over a
reasonable time period and across various entities or divisions
• Employer retains underwriting profit and almost all of the
“expenses” that “cost” 25 to 40% of the premium
• Captive can structure reinsurance using the commercial market
to protect it from catastrophic losses (or less than catastrophic
losses)
Advantages of Using a Captive
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• Cost Savings
• Losses can be higher than expected in any given year,
but the overall cost will be less over a longer period of
time
• Cash flow benefits from retaining premium dollars
in the captive
• The captive has a lower cost structure
Advantages of Using a Captive
8
• Managing Volatility
• Fund commercial market rates in first few years
• Build up surplus to support the program (if claims are
incurred at expected claim levels)
• Reduce rates once sufficient excess funds have been
accumulated
Advantages of Using a Captive
9
• Customized Coverage Terms
• The stop loss policy issued by the captive can be tailored to meet
specialized or current policy requirements
• Reduce one sided contractual provisions and possible claim
disputes
• Disclosure of known claims or conditions requirement
• Exclusions different than coverage of medical plan
• Claim filing deadlines
Advantages of Using a Captive
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• Risk Diversification
• If medical stop loss is placed into a captive covering
property and casualty exposures, risk distribution can
improve because stop loss exposure is “unrelated” to
those other risks
• Having unrelated risks insured together can reduce
overall funding
• Any excess reserves in the captive can serve as the
required capital for the stop loss insurance
Continuum
11
Reinsurance
Stop Loss Policy
Captive Layer
Entity
3
Captive Layer
Capitated
Procedure
Each Claim
Hospital’s
Responsibility
MCO
Entity
2
Entity
1
GBMC Story
12
Stop Loss Policy
 500,000
Losses in
Captive Layer:
2013: None
2012: $150,000
2011: $300,000
2010: $300,000
Captive Layer
Premium Difference Between:
$500,000
and
$350,000
is
$255,000
 350,000
Each Claim
GBMC
Responsibility
Differences of Note for Medical Stop Loss Coverage
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• Medical stop loss coverage provides protection to the
plan sponsor (not the plan) and is not considered as
funding
• It is not subject to Employee Retirement Income Security
Act of 1974 (ERISA) and should not require U.S.
Department of Labor approval
• Actuarial analysis – inquire about alternatives for
funding
Differences of Note for Medical Stop Loss Coverage
14
• Confirm other services provided by stop loss insurer
• Stop loss is “short tail” exposure and will not have
significant IBNR reserves. Therefore, underwriting profit
can be realized quickly and accounting treatment is
important to watch (so reserves can be built)
Hopkins Story
15
Reinsurance
• Stop loss for
programs other
than an
Employer Health
Plan
• An MCO or a
high-dollar
capitated
procedure
(transplants)
have the same
type of exposure
Captive Layer
Entity
3
Capitated
Procedure
MCO
Entity
2
Entity
1
• Different
entities can take
different
retention levels
for employer stop
loss and use the
captive to bring
each entity to the
attachment point
of “affordable”
reinsurance
Moving Forward
16
• Experience Analysis
• Analyze the risk by reviewing prior loss history,
claims and actuarial tables to project losses
• Compare loss projection with the cost of purchasing
stop loss from a commercial carrier at various
retentions
• Determine the appropriate level of risk to transfer to
the captive stop loss policy
Moving Forward
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• Reserves
• Forecast the funding (actuarially determined reserves
and capital requirements) needed to cover unexpected
losses
• Policy Issuance
• Captive will issue a policy to the employer, specifying
the terms under which claims will be paid – dovetail
with excess or reinsurance
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Questions?
Thank You
LBarrec1@jhmi.edu
Eric.Melchior@gbmc.org
KCarnell@rcmd.com
DCary@rcmd.com