EXCESS LOSS CONTRACT TYPE

[Guest jfgc]

We have a self-funded plan with about 875 participants and a $50,000 specific deductible with a $100,000 deductible for one dependent child. Our contract until July 1 was a 12/15 and now the TPA has changed it to a 12/12 for specific and aggregate with the intention of changing it to a paid contract in 2001. Can someone explain the difference between a 12/12 and a paid contract? I am afraid we won't be able to change carriers next year because of this type of contract.

[KIP KRAUS]

Jfgc:

My understanding of a 12/12 SL policy is that only claims incurred in the 12-month period are paid in the 12- month period, and when the contract ends nothing more is paid by the insurer, essentially you pay the run out. There simply is no carry over of incurred claims like in your 12/15 policy.

I have a few questions. Have you thought about increasing the individual and aggregate stop loss amounts? $50,000 and $100,000 seem like very low risks on a group that should have 100% claims credibility such as your group.

Is your TPA getting the commissions on the stop loss coverage? Why is the TPA making your decision for you regarding stop loss contracts? Seems awfully odd that a TPA is forcing such an issue.

[Guest jfgc]

I believe they changed the contract to a 12/12 to make it more difficult for us to change next year unless we can get a carrier to pay run in claims. They seem to work more against us than for us (politics, the brokers are related to an officer and have a long time relationship with the owner so they want to keep their gravy train and prevented us from changing). The difference in premium to change to a $75,000 specific didn't seem to justify enough savings when we believe we may have several specific claims. They were asked to quote net of commission since the admin fee is high for this area over $20 per employee including COBRA and UR.

[KIP KRAUS]

Well, it sounds like you're between a rock and a hard place. Been there, seen it before. The good ol boy dealing with the owner syndrome id hard to overcome. Even if you can find a more competitive TPA with better stop loss premiums, my guess is that the current TPA will find a miraculous way to under cut the quoted rates, because they probably could do it today.

If you dare get competitive quotes, you could alienate the owner. The owner may not realize that his buddy is not so competitive after all, but may not want to be told that. Be careful how you proceed.

[Guest ScottN]

A 12/12 contract means claims incurred AND paid during the 12 month plan year are covered under the reinsurance stop loss contract. A paid contract means claims paid during the 12 month plan year are covered under the stop loss contract regardless of when the claims were incurred.

A paid contract makes more sense if you know you will be staying in a self funded plan. Rates for a paid contract are higher than a 12/12 plan because of the increased claims exposure.

This strategy may make perfect sense in your situation because the 12/12 contract saves some money in this plan year (and it could be a significant amount) over the 12/15 rates. If you know you are changing to a paid contract in the following year, the extra 3 months on the paid side do not provide any extra benefit.

[Guest Bob Taylor]

In my opinion, the mail value in different type of contract arrangements is the flexibility it gives the plan administrator in getting claims paid under the reinsurance contract.

Typically, plans start out with a 12/15 contract when first begining to self-fund. The extra three months on the rear end of the contract gives the plan some extra time to get claims paid at the end of the contract year and still have them covered under the reinsurance policy that was in place during that plan year. This extra time can be valuable if you decide to change reinsurance carriers or discontinue self-funding.

The "Paid" contract does not provide any increased protection at the end of the plan year, it's main value lies in run-in protection by accepting claims that were incurred in the prior plan year but paid in the current year.

We would use a 12/12 contract very carefully. It should only be used when the administrator is very confident that there are no large claims still unpaid from the prior plan year and when you know that there are no potential large claims at the begining of the new plan year.

It is crucial to know your current claims status and health status of your employee population prior to renewing or changing contract terms.

In Florida, we are seeing a very hard market for reinsurance now. We do a careful audit of our claims inventory and discuss potential employee health problems with the client prior to any change in reinsurance contract terms. This is an area where you can find yourself in dire straits before you know what is happening to you.

[Guest ScottN]

The reinsurance market in Colorado is similar to Florida. We use paid contracts when clients are SURE they are going to stay self-funded because a claim cannot be paid that would not fall under the protection of the stop loss contract for a year. We also use a 12/15 specific contract with a paid aggregate contract to help with any individual large claims.

I agree it is good to know of any large claims that may be coming down the claims payment pipe. Depending on the size of the group - and what you consider a large claim - this may be pretty much like predicting the weather. After taking a few self funded groups to a fully-insured plan it is amazing how long some claims take to get billed, re-priced, processed, and paid. It makes you wonder just how much run-out protection is in a 12/15 contract.

[Guest Gary Lapidus]

jfgc:

First, be assured that a company with the number of employees you have, would have no problem negotiating with another administrator, or insurer, to cover "run out" claims. Fully insured carriers can accomodate this request and most third party administrators can do this easily.

It is not unusual for a contract to change to a 12/12 option in the second plan year when you are effectively entering what is considered a mature claims year. As Scott has said, often the additional cost of a 12/15 is not necessary if you continue under a self funded arrangement.

There is a provision most reinsurers offer called a "terminal liability" provision. What this provision does is place a hard cap on the claims liability of a company for the "run out" claims; ie: cliams incurred but not paid within the contract plan year. I will warn you that the terms of this provision vary widely and should be reviewed carefully with one well acquainted with this provision.

Usually the cost of such a provision is less expensive than the difference in cost between a 12/12 and 12/15 contract, but effectively accomplishes the same goal, which is to limit a clients financial liability.

My personal preference is to start with a 12/12 contract and include a terminal liability provision which caps the run out and provides the administration at a pre-defined fee for claims incurred during the policy year, but paid up to six months after the end of the policy year. I would then change the contract to a 24/12 which would cover all claims incurred during the new 12 month plan year, plus the previous 12 month plan year, but paid during the current 12 month plan year. Again; the terminal liability provision would be there as a parachute, if you will, to ensure a limit on the financial liability of the client should they terminate at any point in time. The cost of the terminal liability provides an additional level of insurance and comfort, which can be reviewed at the end of each policy year.

Gary Lapidus