There is a scene in the John Wayne movie, Big Jake, where John Wayne as Jake comes upon a sheep farmer with a noose around his neck, about to be hanged by arch enemy cattle ranchers. Jake decides to make this his business by offering to buy the sheep for a stated very low price. The sheep farmer, played by Bernard Fox, blurts out, “That’s highway robbery.” Jake replies, “Well maybe you think you are going to get a better offer for them today.” The sheep farmer, with a noose around his neck and with no choice, quickly responds, “I’ll take it.”

Will a self-funded employer who was unlucky enough to hire an employee mid-year with twin hemophiliacs boys (running up bills of $800,000 each per year) find itself in the same no-win bargaining position with its stop-loss carrier at renewal time? The employer would have a noose around its neck, and no other carrier would want to make a counter offer. Far too many stop-loss programs clearly and openly state that they determine renewals only on future unknown risks; in this case the twin boys’ risk on renewal would be known, thus they would attempt to put that risk back on the employer through a laser or outrageous rate increase. This is a very real problem that is largely unseen simply because, fortunately, such extreme examples are rare today-but they will become less rare as more and more hyper-expensive specialty drugs come to market as ongoing maintenance medications.

I have had stop-loss carriers tell me that they cannot take the risk of continuing to insure such cases, so they either need to try to get rid of the client or to put the risk back on the employer and make it the employer’s problem. Did any employer ever sign up for that deal? In the old days of selling life insurance, the agent would tout his or her company’s financial strength by saying that you want to pick a life insurance company that lives longer than you do. In the stop-loss marketplace, things are different, because divisions have their own P&Ls to take care off. Thus companies with multi-billion dollar balance sheets can feign poverty by claiming that the margins in stop-loss are too thin to take on that kind of long term risk. One such company, to go unnamed here, has operating income of over $500 million per year and it pays out more than that in annual dividends to its shareholders but it says it cannot take the risk of covering such high cost claims, even though the large claimants were added to the plan under their watch.

Bluntly, maybe these carriers are in the wrong business. Most smaller mid-market employers don’t have the financial strength to take on the risk themselves, and they think that their stop-loss carrier will protect them. Their broker didn’t say otherwise (in too many cases), they only looked at the quote for the coming year and no one told them that they need to ask what would happen in a worst case scenario in the renewal offers in later years. In such a worst case scenario, the client is married to the stop-loss carrier because no other options will exist. If so, how was the courtship before the financial marriage?

In most cases large claims are over and done during the year, with maybe some run over into the next year. The stop-loss marketplace is comfortable in that space. They can rate for that. But some rare conditions can be ongoing for many years, so the actuarial consideration is the expected future cost of the claim (perhaps many millions of dollars) factored by the normal length of time that employees remain on the plan. Since employees often come and go, the risk to the stop-loss carriers on average is less than the full lifetime expected costs. Let’s say hypothetically that the average tenure for such an employee is five years. That means that looking at stop-loss quotes for just the upcoming twelve months simply doesn’t work, and yet that is the industry norm.

If the expected cost for a claimant over the above five year period is, say, $3 million, we have to look at that as a $3 million dollar claim, not a claim for $600,000 in year one and then the carrier gets to bail out with a laser or commensurate rate increase. What other form of insurance can get away with that? During the recent devastating fires in Northern California, over 5,000 homes were reported as being completely destroyed. Does the insurance company get to say that it can hardly be expected to pay full claims to all of its insured losses, so to protect its P&L statements it will only cover some of the claims? Can a life insurance company that sells a $5 million life insurance policy decide later that it can actually only afford to pay $4 million at death due to concerns over the impact a full payment might have on the insurance company’s stock price? We would never stand for that, and we shouldn’t stand for that in the stop-loss market either.

While these concerns are not yet mainstream in the self-funding world, they are bubbling up with some increased concern about what happens if clients have extremely large ongoing claims due to the explosion of high cost specialty drugs. Some large consulting firms have minimum standards for long term protection, such as No New Laser contracts with rate increases per year capped in the 40-50% range on an evergreen renewal basis. The word guarantee can be a problem because in some cases the client does not do its part in allowing the stop-loss carrier to monitor the care to potentially reduce its stop-loss liability. Thus some carriers are unwilling to absolutely say they will guarantee an evergreen contract but in practice they will as long as the client is reasonable on its end. Ultimately there should be some level of partnership between the client and the stop-loss carrier. Ever since the ACA mandated plans have unlimited lifetime maximums, the number of claims over $1 million dollars has skyrocketed, with claims over $5 million showing up. With dollar amounts that large, it is not fair to the stop-loss carrier for those that are overseeing the medical care to simply ignore the high cost that might otherwise be lessened simply because it is the stop-loss carrier’s problem and not theirs.

While not all stop-loss contracts need to comply with the above long term protection (clients are allowed to buy as much or as little protection as they wish), we believe that all stop-loss carriers should have contracts that provide that extra level of protection and then make those contracts readily available to the public, even if at a higher rate.