Employers who sponsor health plans for their employees can purchase insurance contracts to fund those plans. Alternatively, employers can self-fund or self-insure those benefits, agreeing to pay the claims themselves. Many employers who provide self-funded plans also buy stop-loss insurance to cover the risk of exceptionally large claims. However, employers must be careful that their stop-loss coverage provides adequate protection.
A recent case from Alabama highlights the risk of a disconnect between the employer’s plan and the stop-loss coverage. The employer changed to a self-funded plan and purchased stop-loss that provided coverage for member claims that exceeded $75,000 up to a $1 million lifetime maximum. The employer thought that the health plan imposed a $1 million lifetime maximum on benefits. However, the Blue Cross plan that the employer offered its employees had a lifetime maximum only for certain services, such as out of network coverage. Other services did not have a lifetime maximum. (Under health care reform, all plans must eliminate lifetime maximums for essential health benefits so in the future employers should have less difficulty understanding this portion of their plan design.)
A participant in the employer’s plan gave birth to premature twins, one of whom had a serious medical condition and quickly amassed costly medical bills, amounting to over $2.8 million in claims over a several year period. That series of claims exhausted the maximum stop-loss reimbursement and the employer found itself paying an additional $1.8 million dollars in claims above the stop-loss. The employer sued a number of vendors to the plan, including the insurance agents and Blue Cross claiming that they should have alerted the employer to the difference between the plan design and the stop-loss coverage.
Although the employer suggested a number of legal theories under which the vendors might be responsible for the employer’s predicament, the court rejected most of those theories. All claims against Blue Cross were dismissed and most claims against the insurance agents were dismissed. The one remaining claim was a breach of fiduciary duty claim, where the employer argued that the agents had a special relationship with the employer in the design of the plan and the stop-loss coverage. Because the agents were purported to have acted as trusted advisors in the transaction, the court refused to dismiss that claim. Thus, the employer will have the opportunity to show the court that there was a fiduciary relationship between the insurance agents and the employer and that the insurance agents should cover the losses not covered by the stop-loss insurance.
One impediment that the employer will have with its claim relates to the fact that stop-loss coverage is not issued on a guaranteed basis and that stop-loss carriers can underwrite coverage and reduce risk by limiting particular claims. The medical claims of the baby were insured over several policy years. Even if the stop-loss coverage had not contained a lifetime limit, after the first policy year, it was likely that the stop-loss carrier would have refused to cover the medical claims of the child or would have severely limited the extent to which it would have provided that stop-loss coverage in any event. Thus, it is not clear that the employer could have obtained adequate stop-loss coverage once the premature baby was born and it was known that there would be substantial medical claims in future policy years.
There are (at least) two lessons for employers. First, make sure that if your plan is self-funded, your stop-loss coverage does not have restrictions and limitations not reflected in your plan design – or that you are aware of those differences and are comfortable accepting the risk. Second, understand that even if you have adequate stop-loss coverage consistent with your plan design, a high claim that continues through multiple policy years is likely to be limited or excluded from stop-loss coverage after the first policy year. You need to understand that one of the risks of self-funding is that the adequate stop-loss coverage might not be available for claims that span multiple policy years.