Medical-Catastrophe (Med-Cat) Stop-Loss Insurance Options
Catastrophic medical claims risk is changing at a rapidly increasing rate, with costs, duration, and frequency on the rise. In 2014, the Affordable Care Act eliminated lifetime maximum benefits from businesses’ health care plans, which was an especially important cost control factor for businesses with employees who have been diagnosed with rare and costly diseases.
According to the National Institutes of Health, a rare disease is defined as a condition that affects fewer than 200,000 people, but at least 7,000 rare diseases affect 30 million Americans every day. Pharmaceutical companies have started to create cures for these diseases; in 2018, there were 59 new drug approvals to help cure people with rare medical conditions. However, these cures do not come cheap, and the rapid pace of drug and breakthrough therapy advancements for rare disease populations is starting to heavily impact businesses’ ongoing treatment expenses. Most recently, the FDA approved the most expensive drug ever, Zogensma®, a gene therapy that cures spinal muscular atrophy, at a cost of US$2.125 million per dose.
These days, any employee, or one of their covered dependents, with a rare disease could become an expensive medical claimant in a flash. This could happen for one of four reasons: a covered member could have recently been diagnosed with a high-cost condition; a new drug may have been approved to treat a member’s condition; prices could increase for a member’s existing treatment protocol; or a new hire or one of their dependents could have a rare condition which is expensive to treat, like hemophilia or hereditary angioedema. When cases like these occur, businesses need to decide how best to prepare for them. Luckily, they have multiple options.
One option is to buy stop-loss insurance, which is a very popular option for self-insured employers. Traditional stop-loss solutions work best for smaller companies with low deductibles. According to Mercer, 99% of employers with 500-1000 employees buy stop-loss but less than half of employers with 20,000 or more employees buy it. As a result, specific deductibles over US$1 million are uncommon. However, stop-loss insurance can be an unpredictable and challenging solution for many companies for several reasons. Coverage is often expensive, with annual premium increases well in excess of annual medical trends. Further, claims covered in any given year might be excluded at annual coverage renewal through a process called “lasering.” If there is a large claim that is known and expected to continue into the renewal period, the stop-loss insurer may choose to exclude claims for that member from coverage in the renewal year (i.e., the claimant is “lasered”).
Another option for businesses to cover catastrophic medical claims is to create a single parent captive insurance company. Through a single parent captive, a company can pool large medical claim risk with other corporate risks insured through the captive. For catastrophic medical claims, a single-parent captive will provide stop-loss insurance to its parent company’s health care plan, retain a layer of lower-cost risks itself, and will most likely cede a portion of the excess risk to an outside insurance carrier through a reinsurance contract. While this approach may lower costs relative to traditional stop-loss and potentially enable the employer to obtain unique tax benefits, single parent captives are likely to face the same “lasering” issues with reinsurers that employers face in the direct market. In addition, regardless of how large the parent company is, it may still find limited reinsurer interest for deductibles in excess of US$2 million.
Another potential option for employers is a group captive. Through a group captive, each participating employer retains a layer of risk individually, then pools a layer of medical claim risk with other employers participating in the group captive. Excess claims are ceded to a reinsurer or to a fronting insurer. Because the group purchases the coverage together, they can leverage better pricing and contract terms than they could access individually.
The main disadvantage with group captives is that different companies have different needs and growth rates, which can make it difficult for all participants in the captive to agree on what it should look like. One of the newer group captive approaches to catastrophic medical claims is the MedCat Insurance Company, offered by Mercer. MedCat helps large companies looking to purchase stop-loss coverage in excess of US$2 million share. The risk of claims in excess of US$2 million is pooled among group participants, but the risk is capped through a collectively purchased reinsurance policy. The collective size of the group helps lower the cost and limits the reinsurer’s ability to laser claims. Further, if experience runs better than expected, excess premium is refunded. Claims and risk management is provided by clinical and pharmacy specialists with years of expertise to help identify potential catastrophic claims early on and manage them should they occur.
Dealing with employees who have rare disease conditions can be costly, but there are many options available for you to mitigate your risk no matter the size of your organization. Once you find the solution that works best for you, your catastrophic medical claims will be well-managed and your bottom line well-protected.