How Self-Insured Plans Can Avoid the High Cost of Gaps in Coverage

By Ron E. Peck, Esq.

Sr. VP & General Counsel

The Phia Group, LLC

It is a fact that stop-loss is not health insurance. It is a form of financial reinsurance. Health insurance receives medical bills, processes the claims, and pays medical service providers for care rendered to insured individual patients. Stop-loss allows others to handle the “health insuring,” and instead provides protection to such health benefit plans against debts – incurred by those benefit plans – when payable claims exceed a deductible.

To function, stop-loss carriers need to understand what makes the health plan “tick.” What is it likely to pay; what will it most certainly deny? No prediction is perfect, but by examining the applicable plan document, past claims data, makeup of the plan’s insured population, and more, stop-loss is able to at least make an educated guess as it relates to risk, and quote a premium rate payable by the plan to the stop-loss carrier that should cover the cost to stop-loss while still making stop-loss an attractive option for the plan.

Sadly, it seems that – with increasing frequency – a lack of communication or presence of conflicting interpretation is resulting in stop-loss and benefit plans disagreeing regarding what is payable, how much is payable, and thus – what is covered by stop-loss. Even more tragically, the growing number of disputes between plans and stop-loss carriers is leading to an increased number of claims paid by benefit plan sponsors that are not reimbursed by stop-loss, resulting in employers enduring negative experiences with self-funding, financial ruin, and legislative scrutiny.

Examples of such conflicts range wildly. Some obvious issues come up when the plan document and stop-loss policy explicitly conflict. Consider, for instance, the case where the plan document excludes claims arising from felonious acts, and the stop-loss policy prohibits reimbursement for claim payments arising from illegal acts. If a plan participant is injured in a drunk driving incident, in most cases, it’s a misdemeanor (not a felony), meaning – based on the language I just shared – the claim is payable by the plan, and deniable by stop-loss.

Next, we have situations where the language is the same (or “mirrored”), but the plan and stop-loss differ in their interpretation of the plan’s meaning. Consider, for instance, if the plan document and stop-loss both exclude claims arising from “illegal acts.” The gap described above is no longer an issue, however, in this case the plan does not consider speeding on the interstate (65 miles per hour in a 55 mile per hour zone) to be “illegal,” but stop-loss does. If someone has an accident while driving 65 MPH in a 55 MPH zone, the plan would consider the claims payable while stop-loss would deny reimbursement.

Next we have situations where the plan document is simply not followed or enforced. In this instance, both the plan document and stop-loss exclude claims arising from illegal acts, the participant is injured during the commission of a crime both the plan and stop-loss agree is illegal, and yet – whether it was an administrative or clerical error, or something else entirely, when the claims arrived the plan paid them.

All three examples above are popping up with more frequency. Unfortunately, the fact patterns are rarely as clear cut as the ones being described above. Instead, the disputes involve payable rates and networks. They also involve the employer’s handbook.

For instance, a plan document may define the maximum payable rate as “usual and customary,” and define that as being a number calculated by reviewing what most payers pay. The plan takes that to mean “private payers,” while stop-loss includes Medicare as a “payer” when calculating the payable rate. Or, perhaps the plan applies usual and customary only to out of network claims – choosing to pay per a PPO network contract whenever possible, but stop-loss interprets the term “maximum payable” to apply to all claims – in and out of network; arguing further that the plan document controls the plan, and stop-loss only insures the plan. The employer, not the plan, agreed to the network terms – and stop-loss isn’t compelled to honor those network terms when they, in the stop-loss carrier’s opinion, require the plan to pay more than the plan document allows. Finally, consider a scenario where an employer sponsors a benefit plan (complete with a plan document), but also has an independent and separate employee handbook. The plan document states that participants who fail to come to work for 30 days or more are removed from the plan. Meanwhile, the handbook says that – as long as an employee is on an approved leave – they will be covered by the health plan. The employer is bound by the handbook; the stop-loss carrier only insures the plan.

These and other “gaps in coverage” are continuing to impact us all, and in – what I believe – to be increased frequency. As the cost of healthcare continues to skyrocket, I believe that many stop-loss carriers are no longer willing to turn a blind eye to costly plan and third party administrator errors and oversights, and are applying what they believe to be “tough love,” teaching their policyholders what it takes to stringently enforce a cost-contained plan. Unfortunately, for many of the plan sponsors who are being “spanked” – one slap is enough to turn them away from self-funding indefinitely, and worse, invites regulatory scrutiny. Indeed, DOL audits are up, and this “infighting” between the plan, TPA, and stop-loss is the cause of some of these examinations.

To address this issue, it behooves both the plan (and its TPA) and stop-loss carrier to examine the plan in its entirety during the underwriting process. What do I mean by “entirety?” The plan document is not enough. A plan is more than an “SPD.” It is also the network contracts, employee handbooks, and any other document or obligation that dictates how the plan will actually be administered. Only by laying all of those cards on the table ahead of time and agreeing collectively how the plan will be administered in all such circumstances can disputes like the ones I described be addressed before real money is at stake. Most plan sponsors don’t understand this, and I urge stop-loss carriers to explain this to their potential clients… letting them know… “If you want us to insure it, we need to see it BEFORE we quote a premium.”