There’s an old proverb -- “Trees don’t grow to the sky.” That is, even though something may appear to have no barrier to growth, there is still a natural limit. When it comes to medical claims, even after the Affordable Care Act removed caps on health benefit payments, most employers felt there would be a natural limit. After all, claims in excess of $1 million were unusual and claims in excess of $2 million were rare. But, fueled in large part by the high cost of specialty drugs, the natural limit is changing.
First, the trees are growing taller than ever before. Claims $10 million, $20 million or bigger are hitting employers like bolts of lightning, blowing up self-insured health budgets. Most often, these claims are driven by specialty drug treatments for rare, extreme conditions like hereditary angioedema and hemophilia. Truth be told, we don’t know how tall a tree can grow.
Second, some of these very tall trees are becoming permanent features of the landscape. Historically, large claims for organ transplants or premature infants would spike and then recede. Once the underlying condition resolved itself, claims would usually drop in the following years to a more manageable level. But that pattern is changing as more claims spike and then stay at that level. Because the drug treatment protocols for conditions like hereditary angioedema and hemophilia are more maintenance-like than curative, those $10-$20 million claims are becoming annuities.
The traditional approach to mitigating the risk of catastrophic claims is to buy stop-loss insurance. But buying stop loss – through direct markets or by accessing reinsurance markets through a captive – may not be a complete solution. Here’s why:
Given the limitations of the stop loss coverage, what’s an employer to do about these new super-tall trees? (Let’s rule out sticking your head in the sand and hoping for the best.) You can consciously choose to assume the risk, accepting the impact of the increased volatility. You can choose to transfer the risk through stop loss insurance, accepting the limitations noted above. For employers seeking stop-loss deductibles of $1M or more, utilizing a captive can help by accessing reinsurance markets. Some employers may also find it more palatable to retain and participate in the risk of these catastrophic claims in a vehicle like a captive than through the company’s general ledger. But, many of the limitations that apply when stop loss is purchased directly also apply when stop loss is insured through the employer’s captive.
Even if your CFO or risk manager hasn’t asked you about alternatives to your current risk management strategy, you can bet they’ve given it some thought. Try to get ahead of the conversation and learn about the different solutions in the market. Don’t let the trees grow to the sky -- there are innovative options like our Catastrophic Claim Captive Solution that can help large employers address the challenges in the traditional stop-loss market and manage the changing face of risk.
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