Stop loss under siege

Stop-loss pools are under continued pressure to accommodate the ever-increasing number of claims for high-cost drugs. The explosion of claims for drugs to treat the Hepatitis C Virus (HCV), for instance, has hit all drug plans and carriers alike – and hard.

While the debate rages on as to whether these drugs constitute recurring claims, the fact remains: stop-loss claims are on the rise. The questions raised include: Are these the only challenges we need to face and what can all stakeholders do about the problem?

HCV drugs are, of course, not the only high-cost drugs that exist in carriers’ books of business today. There is the launch of new biologic drugs, as well as today’s ever-present patients being treated for rheumatoid arthritis, multiple sclerosis, and a whole range of persistent disease states.

However, the HCV drugs represent a “cure” and several brokers have remarked that, since the patient is not being treated repeatedly, the experience should be removed from consideration.

The problem this leads to is a feeling of dread among carriers that believe where there is one, there will be many. One plan member may be successfully “cured” but the incidence of disease in the Canadian population seems to indicate that today’s patient will simply be replaced by another claiming in the future.

According to the Public Health Agency of Canada, some 242,500 Canadians have been infected with HCV and 21% of these are unaware of their condition. The fact that this smaller subset of the larger group also remains infectious seems to support the carriers’ concerns that the “Harvoni parade” might not end anytime soon.

In addition to the growth curve and adoption rates of new high-cost drugs there is also another, perhaps more insidious, challenge to the health of stop-loss pools in Canada today: inflation.

Drug inflation is not a term we have heard mentioned often of late. The fact that generic drugs are widely accepted in today’s health plans has helped to curb what was once a runaway problem. But the problem exists, nonetheless.

Most carriers, according to the annual Buck Consultants study, include trend, inflation and utilization factors in health plans for drug expenses well in excess of 10%. Of course, this is not reflective of the true cost of the drugs covered; instead, it covers additional costs for expected increases in treatment costs, reserves and other insurance costs.

It has been widely recognized that even administrative services only (ASO) stop-loss plans are under increasing pressures and many carriers have started to increase their stop-loss rates by amounts at, or perhaps even higher, than this amount. For the purposes of illustration, let’s use the 10% inflation factor as a suitable market proxy.

Table #1: Growth of paid claims vs. stop-loss paid claims

YearAttachment levelInflationPaid claimsStop-loss claim paid% increase in stop-loss claim

The table above provides proof that, although paid claims in each sample drug plan shown are increasing at a rate of 10%, the effective rate of increase to the amounts paid out in stop-loss claims are very much in excess of that rate of growth. Without taking appropriate action, the plan may not be sustainable.

The fact that increases in stop-loss claims paid are outpacing the growth in paid claims – and by default the amount of stop-loss premium collected (usually administered as a percentage of paid claims) – is cause for very grave concern. This cycle is manifesting itself in terms of anticipated increases to stop-loss premiums in the year ahead of between 30% and 50%.

But that’s not all.

Table #2: Attachment level erosion

YearValue of servicesValue impacted by 10% inflation

Our second table shows the equally alarming impact of medical inflation on the purchasing power of the very attachment levels to which we have become accustomed. If we accept the same inflation factor of 10%, then we see the effects of inflation at year-end in each base year, eroding the value of goods and services purchased.

In effect, at the end of the five-year period, $10,000 in Year 1 would only purchase less than $6,000 in goods and services at the end of Year 5. This is, of course, an illustration only and does not reflect any decreases in cost given increases in productivity.

So what is the lesson here?

Metaphorically speaking, years from now, when natural and man-made disasters take their toll, general insurance companies have no choice but to increase the premiums rates they charge and to encourage their clients to accept more risk by way of higher deductibles.

The fact that we are dealing with people’s health seems to cloud the very nature that insurance must be transacted at sustainable rates. If today’s claims are tomorrow’s premiums then the future of benefits “entitlement” must be tempered by the realities of what we can afford – in either insured or ASO funding models.

Plan sponsors have three options. Firstly, they can simply accept the fact that high-cost drugs are likely a fact of life and will come at ever-increasing costs. Secondly, they can choose to accept a higher degree of risk by increasing their attachment levels to help offset increasing costs and the erosion of the purchasing power of their plans. Or, finally, they can de-list several, or all, high-cost drugs from their plans and enlist the help of whatever provincial drug plans may be available.

But would this open an entirely new can of worms? There are no easy answers.

The end result is the same. Stop-loss premiums are under siege. Expected changes to benefits plans, the migration from defined benefit to more defined contribution plans, and the evolution of today’s employer-employee social contract will no doubt cause things to look very different in the future.