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Stop-Loss “Gaps”: Level Funding Is Far From Immune

By: Jon Jablon, Esq.

Level-funding is a method for self-funded plans to effectively cap their monthly expenditures. It usually entails reinsurance with an aggregate deductible only, and it relies on the notion that the carrier will reimburse the employer for plan benefits paid above the aggregate deductible, most often on a monthly basis, and usually including advanced funding. That sounds fantastic from a risk perspective; the ability to cap monthly claims expenses at a predetermined level can eliminate the high aggregate claims risk inherent in self-funding!


Something that isn’t usually part of the discussion, however, is that a level-funded program entails a stop-loss policy like any other, complete with exclusions, limitations, and, accordingly, potential gaps in coverage. In other words, not everything the plan pays will be reimbursable by the carrier. No level-funded program is immune from the potential for stop-loss denials, just as no stop-loss policy (or any other insurance plan or policy, for that matter) could ever unconditionally cover all claims.


Even with level-funding, generally marketed as a way to cap the plan’s claims liability, a claim could be paid by the plan that is later denied by stop-loss, effectively unexpectedly increasing the aggregate deductible. A common example is a claim payment made subject to a network contract; if the plan pays its negotiated rate, but the carrier limits its own per-claim allowance, as is generally the case (likely via a U&C provision), the plan is going to pay more than the carrier allows for a given claim, and the portion above the carrier’s determination will be denied, perhaps contrary to the policyholder’s expectation of an absolute cap on its claims expenditure. It’s not the intended topic of this particular blog post, but note that stop-loss policies that insure PPO plans – including level-funded plans – very often do not allow the full contracted rate in the policy, instead limiting the carrier’s liability based on a percentage of Medicare or some other non-PPO based metric.


The plan may therefore end up unexpectedly having to pay more than its agg deductible in claims, since the agg deductible applies only to eligible claims – and what constitutes an eligible claim depends on the terms of the particular policy (and sometimes it depends on the carrier’s discretion, in a situation where the stop-loss policy has no specific exclusion but the carrier interprets the plan’s language, which we call a “soft gap”). For this reason, due to the underlying expectations and assumptions involved in a level-funded arrangement, it is just as important – if not more important – to eliminate gaps between the plan document and stop-loss policy; employers relying on level-funded stop-loss often budget for a hard limit on monthly claims spend, but that hard limit sometimes turns out to not be quite so absolute.


When vetting a level-funded policy, just like any other stop-loss policy, make sure you “mind the gap” and be acutely aware that some expenses paid by the plan might not be eligible for reimbursement under the policy. Those expenses won’t be counted toward the stop-loss deductible! A preemptive “Gap-Free Analysis” by The Phia Group can help identify areas where gaps in coverage are likely to arise, so employers and health plans can minimize the potential for stop-loss denials.


For more information about our Gap-Free Analysis offering, please contact PGCReferral@phiagroup.com.