Selecting an Individual Stop Loss Deductible for Self Funded Medical Plans
Employers that self-fund their medical plans and the benefit consultants that advise them often question, what is the “best” individual stop loss (ISL) deductible. This white paper outlines the three steps we recommend should be followed in choosing the ISL deductible. The right deductible will not be the same for all groups even if they are very similar groups. Considerations include group size, risk appetite of the employer, and pricing available in the stop loss market. Many in the employee benefits industry stop after some variation of step 1 and we believe that is an inefficient approach to selecting the ISL deductible to purchase.
Not covered in this document are other stop loss considerations including aggregate protection, policy type, aggregating specific deductibles, lasers, rate caps and carrier credit ratings.
Step 1 – Starting Point
The first step is to determine a starting point. Some will stop after this step while we consider it to be the least important step in the process. The starting point for consideration of the ISL deductible is based on the enrolled employee count. We suggest using the following table to determine this starting point, while other methods resulting in similar starting points may work just as well.
Step 2 – Assess Risk Tolerance
The second step is to assess the risk tolerance of the employer. This is the most important step in determining what stop loss deductible should be utilized but is also the most difficult. Two considerations are what level of risk can the employer bear financially and how important is being close to budget versus reducing the cost. As in most financial situations, there is a tradeoff of risk and reward. Groups that are able to retain more risk will pay less in stop loss premiums and therefore reduce overall cost. Meanwhile groups that must be able to closely project future costs or have lean capital available may need to transfer as much risk as they can.
The starting point from step 1 is just that, a starting point. Now we want to move up or down from that starting point based on the risk tolerance, or risk appetite, of the employer. Groups that require tight budgeting such as government employers and groups that do not have available capital or access to capital may want to move substantially down from the starting point. Groups that care little about accurate budgeting and want to reduce cost as much as possible may want to more up substantially from the starting point deductible.
Some questions to consider are, can the employer fund 3 large claims up to the considered deductible in a month? If the answer to this is no, or if such a situation would put considerable financial strain on the company, then a lower specific deductible should be considered. The employer should be comfortable with the amount of risk they are taking on versus transferring to the stop loss carrier.
Step 3 – Compare Pricing
The third step, once the ISL deductible has been narrowed down to a level that the employer is comfortable with, is to compare the pricing at different specific deductibles. For example, if the employer is comfortable up to $150,000, a quote should be obtained for multiple levels, perhaps $100,000, $125,000 and $150,000 and the pricing for these deductibles compared. This comparison may be across multiple insurers and include other coverage differences beyond just the ISL deductible.
Comparing stop loss pricing is a service Benefit Innovators provides as part of our comprehensive self funded cost projection and renewal review so we won’t provide details of how that is done in this document, but the goal is to determine the best priced option within the risk tolerance range of the employer. This may lead to significant savings to the employer as insurers will often under-price one of the quoted options and narrowing in on which option is priced most attractively is an important final step to determining the right individual stop loss deductible.