The Internal Revenue Service, along with the Labor Department and the Department of Health and Human Services, are looking into the use of stop loss insurance, particularly by companies that self-insure their health insurance plans.

On Friday, the three agencies released a request for information regarding the use of stop loss insurance by group health plans and their plan sponsors, with a focus on the prevalence and consequences of stop loss insurance at “low attachment points.” An increasing number of companies are self-insuring their employee health insurance plans in response to the rising cost of health coverage, while outsourcing the administration of their plans to large health insurance providers.

However, to safeguard against catastrophically large claims against their self-insurance plans, companies frequently also purchase stop loss insurance from the health insurer administering the plan so the funds won’t be severely depleted because of a few employees who suffer grave illnesses or injuries. The attachment points function similar to deductibles for stop loss insurance. A low attachment point means the stop loss insurance kicks in at a lower level and makes it more attractive for companies to opt for the self-insurance model. However, regulators are worried that insurance companies will cherry-pick companies with relatively healthy employees and offer them low attachment points for their stop loss coverage in order to encourage them to self-insure, while raising the attachment point for companies with older employees who need more health services. Companies that self-insure are also not subject to many of the requirements of the Affordable Care Act, which has also spurred interest in the self-insurance model among many employers.

The IRS, the Labor Department and the Department of Health and Human Services have published a questionnaire about stop loss insurance to learn more about how it is being used by self-insured companies and health insurance carriers.  Comments must be submitted on or before July 3, 2012. 

They noted that employers and plans that purchase stop loss insurance generally are not subject to state health insurance laws, including coverage laws, rating policies, and other state and federal consumer protections applicable to health insurance, including certain patient protections under the Affordable Care Act. 

“It has been suggested that some small employers with healthier employees may self-insure and purchase stop loss insurance policies with relatively low attachment points to avoid being subject to these requirements while exposing themselves to little risk,” they said in the document. “This practice, if widespread, could worsen the risk pool and increase premiums in the fully insured small group market, including in the Small Business Health Options Program Exchanges that begin in 2014.”

Among the questions in the document are: “How common is the use of stop loss insurance in connection with self-insured arrangements? Does the usage vary (and, if so, how) based on the size of the underlying arrangement or based on other factors? How many individuals, if known, are covered under stop loss insurance (either nationally or on a state-specific basis)? What are the trends? Are past trends expected to be predictive of future trends? Is the Affordable Care Act expected to affect these trends (and, if so, how)?”

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