Self-funding is pervasive in the employer-provided health benefits market. There are financial reasons for this, largely relating to cash flow, but there are regulatory incentives as well, primarily because ERISA, the main federal law governing employment-related benefits, exempts self-funded plans from most state regulation. Self-funding, particularly by smaller employers, has become controversial because it is viewed solely as a method to escape those state regulations and the reinsurance sold to small employers has often been characterized as thinly-veiled primary coverage. Some states are introducing new rules to try to assert greater control over the health stop-loss market. In the midst of this, Milliman, the large actuarial firm, issued a report on the characteristics of employer stop-loss coverage. (Milliman Report) The report is based on a survey of the eight largest reinsurers in this category, who cover about 50% of the total market.
Companies with 100 or fewer employees are about a fourth of the total number of employers getting stop-loss coverage, but they represent only 2% of all employees in plans covered by reinsurance. Eighty percent of companies had a deductible of $50,000 or more and in 2013 the median deductible was $85,000 across all firms, although it is lower for small companies–$30,000 for employers of under 50 workers and $45,000 for those with 51-100 employees. Only three-tenths of a percent of reinsured companies had a deductible less than $20,000. Stop-loss typically includes both specific coverage, which as its name suggests, relates to a specific individual claim, and aggregate coverage, which relates to all claims incurred by the employer. Almost no employers buy aggregate but not specific coverage, but many very large employers will purchase specific but not aggregate coverage, fearing only truly catastrophic claims. The data presented in the report do not support the notion that there is a widespread practice of small employers buying stop-loss that is really just another way of doing primary health insurance with the purpose of evading state regulation.