How stop loss can protect a small business
BY Nate Hendley | August 22, 2011
A small-sized Canadian firm, let’s call them Maple Leaf Suppliers, offers a medical insurance plan as part of their employee benefits package. Most of the company’s employees incur relatively low healthcare expenses. One worker, however, develops a rare medical condition and in a single year racks up a prescription drug bill of $30,000.
The daunting question the advisor and small business owner will have to face is: will this enormous outlay cause Maple Leaf’s premiums to spike when the company renews their policy?
If Maple Leaf’s policy has a stop loss provision, the answer is no.
Stop Loss—also called drug or healthcare pooling protection or drug or healthcare stop loss pooling—saves employers from being hit with huge premium hikes when employees incur expensive drug and medical treatments on company insurance plans.
“Stop loss is really just a funding mechanism designed to protect the viability of an insurance plan so that one catastrophic claim doesn’t knock the rates out of whack,” explains Jamie Meldrum, a partner at the Ottawa-based Carleton Financial Group.
Carleton provides financial advice to a diverse client base and negotiates stop losses as a matter of routine for small and medium-sized firms.
Here’s how stop loss works: say Maple Leaf Suppliers has a pre-determined pooling or stop-loss level of $10,000 per individual. Employee medical expenses that were “over and above this amount would not be taken into account when experience rating the premium for the upcoming policy year,” says Brad Fedorchuk, vice-president, group marketing at The Great-West Life Assurance Company, based in Winnipeg.
In other words, even if one employee did have an annual drug bill of $30,000, Maple Leaf’s premiums would still be based on a stop loss level of $10,000 per worker, plus a pooling charge.
Needless to say, such an arrangement can save a small firm a significant amount of money.
“Some new therapies can cost in excess of $20,000 per year, per patient. Depending on the illness, those costs can be ongoing for several years. Even with the savings achieved through lower absenteeism, higher productivity and fewer hospital stays, the impact on the drug plan’s experience could result in significant health premium increases at renewal time. Healthcare stop loss pooling helps protect groups by reducing the likelihood of such a scenario,” explains Meldrum.
“The cost of drugs is rising. It’s also much more common for someone to have $20,000 of drug treatment than it was 10 years ago,” he adds.
An advisor should be ready to answer the following questions: how comprehensive is the pooling protection? Are recurring claims included in the pool? Are there any exceptions to the plan (i.e. drugs or medical treatments that are not considered eligible or covered expenses)?
As for what small companies should be thinking about: “A plan sponsor must understand how variable his claims experience has been and will likely be in the future. It’s an advisor’s role to help him with this analysis. The plan sponsor must then decide what his risk tolerance is and what size of claims he should be protected from,” states Jean-Guy Gauthier, manager, strategy and product development for group insurance at Standard Life Canada, headquartered in Montreal.
Generally, most employee workplace medical insurance packages will contain stop loss provisions, says Meldrum. It’s not a feature that small companies have to ask for.
Being ubiquitous isn’t the same as being obvious, however. Some firms might not realize they have stop loss protection, much less the role this feature plays in holding down premiums. As the development of innovative and expensive new medical treatments continues the demand for them will increase. It’s up to an advisor to keep his or her small business owner up-to-date on the stop-loss features of their plans, particularly in an era of rising medical costs.