Stopping the loss: a surprising mix of insurers and reinsurers are working behind the scenes to improve health care and reduce catastrophic medical claims.

Chris Brown still vividly remembers the day, 15 years ago, when the first premature baby medical claim topped $100,000.

"We sat around the table wondering how we could handle claims that large," said Brown, vice president of stop-loss product for Sun Life Financial U.S. "We wondered if that meant the end of our business as we know it."

The industry has not only handled those claims, and larger ones, but has become more savvy and knowledgeable about preventing those claims in the first place.

Called employer medical stop-loss coverage, this insurance coverage is estimated to be about a $5 billion annual market, said Randy Werner, vice president of speciality health sales for Zurich Financial Services North America. The product itself is similar to reinsurance--it doesn't cover first dollar losses--but because it's offered to non-insurance companies, it's not a reinsurance product. But you might be surprised to find out what kind of insurers are specializing in this catastrophic risk.

"The product was developed as a casualty product," said Werner of Zurich, the fourth-largest writer of commercial multiple peril in the United States, according to A.M. Best Co. data. "But we do compete with life insurance companies and other property/casualty companies. This really is a product that fits in both the property/casualty world and the life insurance world," he said.

Health insurers and health maintenance organizations also purchase a similar product, called excess of loss reinsurance, which is a reinsurance product. Medical stop-loss writers purchase reinsurance, too. Many of the insurers and reinsurers that deal with catastrophic medical claims, either by working directly with self-funded employer programs or as reinsurers, have established programs to help mitigate the catastrophic claims. They start by providing specialized assistance to potential claimants in an attempt to stop the claim from ever happening. Their biggest success stories, the patients they help to keep healthy, most likely have no idea who they are.

Tiny Patients, Largest Claims

Against a backdrop of rising costs and expensive medical advances, more employers are moving to self-funded health insurance. Instead of giving premiums to a health insurer, these companies set aside their own pool of money, hiring someone--a third-party administrator or health insurer--to pay the claims from the pool, while the employer shoulders the risk. Last year, 54% of U.S. employees covered by insurance through their employer were enrolled in self-funded plans, up from 49% in 2000.

Most self-funded plans can easily handle average, day-to-day medical claims, but even a single catastrophic claim, such as an employee with a premature baby or someone in need of a heart transplant, could devastate the employer. So most employers purchase coverage for these rare, but very expensive, medical claims.

The smallest patients can lead to the largest claims. The average cost for a baby born at 24 weeks (full term is 40 weeks) is $300,000, but can be as high as $500,000 or more, according to Jane Johnson, director of ING Re's Reinsurance Outcomes and Service Experts program.

Premature babies are not a new phenomena. Preemies weighing less than three pounds were put on display, in their incubators, at the World's Fairs in the early 1900s. Today premature births are routine, even if the costs to care for them are not. Modern babies smaller than a pound have been sent home after spending two or three months in neonatal intensive care--which typically can cost $2,500 a day, but can run as high as $6,000 a day depending on the region and the facility.

"Every day you're able to keep the baby in utero saves three neonatal intensive care unit days," Johnson said.

ING Re, a reinsurer, has created a program specifically to work with at-risk mothers to prevent or minimize premature births. The program is offered to ING Re's clients, which are insurance companies, but trickles down to reach individual patients. ING Re's medical experts are able to educate and provide guidance to high-risk mothers, who aren't likely to ever hear the words "reinsurance" or "stop-loss."

"All they know is that at the request of the health plan, this service is available," Johnson said.

"We're very much behind the scenes," said Michelle Fallahi, vice president of medical and managed care reinsurance for ING Re.

With the patient's permission and the health plan's direction, ING Re's nurse case managers offer educational information and screenings, and help coordinate alternative services, such as keeping the mother at home vs. in the hospital, and getting the baby out of the hospital earlier. The reinsurer's goal is to improve outcomes and reduce costs.

"If we generate any savings, not only does it benefit our client, but potentially the self-funded client. It goes right to their bottom line," Fallahi said.

Medical Miracles, Routine Care

What was a medical miracle 50 years ago is a routine operation today, and insurers have had to adjust to that mindset.

For instance, the first successful kidney transplant took place in Boston in 1954. This year there will be 16,149 kidney transplants in the United States, with first-year bills of about $210,000 each, according to an estimate by Milliman Consultants and Actuaries.

The estimated annual billed charges for transplants are $11 billion in the United States, said Steve Mueller, senior vice president of sales for Zurich NA.

Transplants are not only becoming more common, but more complicated and potentially more costly, said Nick Ortner, an associate actuary with Milliman. State and federal programs are increasing awareness about organ donation, which increases usage, while improvements in science and technology are helping doctors perform more complex operations. For the first time, Milliman included multiple-organ transplants, such as liver-pancreas-intestine transplants, in its 2005 research report on organ and tissue transplant.

"These multi-organ transplants are becoming more prevalent," Ortner said.

Stop-loss carriers can help advise patients about the best transplant practices and provide information regarding transplant outcomes at various transplant centers. They also may provide access to disease management programs, which can help prevent the need for a transplant in the first place.

For instance, renal disease has become more common because of the rise in obesity and diabetes. So Zurich NA offers disease management to help patients stay healthier.

"We try to provide as early an intervention as possible," said Mueller. "As a precursor to transplant we provide case management assistance to provide best practices and best treatments for the best possible outcome. We want people to get the best treatment possible."

Some self-funded plans are using predictive modeling tools, computer-based programs that use historical claims data to determine the likelihood of a given population getting certain diseases. These programs can identify high-risk individuals who would benefit from early intervention or preventative action, such as programs to help employees lose weight or quit smoking.

"Self-funding puts the decision making in the hands of the people who can influence the outcome," Brown said." If I am an employer who is bearing the costs of my employees' health, I will have smoking cessation programs, and I'm going to have an exercise room, and I'm going to implement a wellness program, and I know If I do these things, it will save me money on health care and improve the productivity of the employees."

Healthier people lead to lower medical costs.

"Providing medical management can help control the costs for everyone, including what the employer pays for first-dollar coverage, as well as stop-loss coverage," Mueller said.

"Helping control claims costs is good for us, and good for the consumer. And it helps to sell business. We use it as a selling tool," said Werner of Zurich.

Sun Life Financial U.S., the 23rd-largest life writer by admitted assets in 2004, according to A.M. Best, has a similar program." It can not only decrease the costs of the claim, but can also improve the outcome for a patient," Brown said. He said a third-party administrator or underlying health plan can call Sun Life's nurse not just for stop-loss claims, but for help on any claims they have.

For instance, the insurer was able to help one company reduce the prescription drug spending on a hemophiliac patient to $17,900 from $30,700 a month by using a preferred cost savings vendor. "In the past, people who were hemophiliacs died or suffered needlessly. These drugs have improved life for these people, but keep in mind that the costs must be absorbed by the employer's plan. We need to do what we can to keep these costs affordable to employers who pay the bills," Brown said.

Special Techniques

When writing medical stop-loss coverage, insurers will often ask the employer to disclose any employee at risk for catastrophic claim. Say the company knows it has a candidate for a kidney transplant. It discloses that potential claim to the stop-loss writer, who could raise the rate of the stop-loss policy to cover the additional risk, or place a higher deductible on that individual. That's called "lasering."

Sun Life doesn't laser high-risk individuals when it renews its policies. "Similar to fire insurance, if your house burns down, you wouldn't expect your premium to increase by an amount equal to the cost of your house. Managing this business is very much dependent on the law of large numbers. The key is knowing the incident rates for these risks," Brown said.

Zurich offers a "carve out" program, which allows self-funded employers, or HMOs, to transfer the catastrophic risk of transplants. Zurich provides access to a national network of transplant centers, case management, medical decision support, clinical and financial reporting, and insurance.

"All transplant-related costs are carved out. Unlike stop-loss, carve-out transplant programs have no deductible and no co-insurance," Mueller of Zurich said.

Some employers want their stop-loss carrier to decide what types of claims should be covered. That's not appropriate, Brown said. "We aren't the fiduciary of the plan. We have nothing to do with whether the employee should have coverage under the employer's plan. The stop-loss insurance policy has provisions that provide for the reimbursement to the employer for a catastrophic claim covered in the underlying," he said.

While many self-insured employer plans won't cover clinical trials, Sun Life does offer a rider to cover those costs.

"Many employers exclude coverage for experimental treatments, such as clinical trials," Brown said. "If employers choose to cover clinical trials in the underlying plan, we provide a provision to cover them under a stop-loss contract. It is a difficult decision for an employer to deny coverage for experimental treatment when it is the last available alternative to a covered individual. The difficulty lies in the fact that clinical trials are very expensive and are still considered experimental."

Sometimes claims can add up from the same accident or incident, but still fail to meet a deductible or retention. ING Re offers a multiple loss product that allows the health plan to aggregate related claims from the same incident towards a single deductible. For instance, if the deductible was $500,000, the insured could have four patients--say a mother and premature triplets--each with $400,000 in medical claims. The multiple loss provision would kick in to give the plan coverage which it wouldn't have otherwise.

The 2003 fire at the Station nightclub in Rhode Island, which killed 100 people and injured more than 200, also could be an example that could trigger a multiple loss deductible. The fire "had very serious implications for insurers in that area," Fallahi said.

The Future

Medical stop-loss writers and excess of loss reinsurers see no end to improving health-care technology--and higher medical costs.

One change on the horizon is how the health-care dollar will be spent, said ING Re's Johnson.

"It used to be that inpatient services were the bulk of the claims. It is still a high percentage, but we're seeing more outpatient claims, and high-cost drugs, that companies want reinsurance protection for," Johnson said.

Claims also are getting more complicated, such as multiple organ transplants, Fallahi of ING Re said. "It used to be a single diagnosis was the reason for the claim. We're seeing more claims with a number of conditions. I think that's a sign of the aging population, and reinforces the need for reinsurance for our clients," she said.

Another sign of things to come is as biotechnology continues to advance, doctors will be able to diagnose problems before any symptoms show, and are likely to prescribe designer drugs that could cost several thousands of dollars a month, Brown said.

As health-care spending continues to rise, so will the popularity of self-funded employer plans, he said, which should mean a growing demand for medical stop-loss coverage.

"Medical stop-loss coverage is what holds together the self-funded plans," Brown said. "It's a very important part of the health-care delivery system in America."

Key Points

* Medical stop-loss covers self-insured employer health plans for catastrophic health claims.

* Many insurers and reinsurers provide specialized assistance to potential claimants in an attempt to stop the catastrophic medical claim from ever happening.

* Stop-loss writers also use predictive modeling to determine the likelihood of a given population contracting certain diseases.

Learn More

ING Re A.M. Best Company # 06846 (ReliaStar Life Insurance Co.)

Distribution: Direct, brokers

Zurich Financial Services NA Group

A.M. Best Company # 86976 (Zurich Financial Services Group)

Distribution; Brokers

Sun Life Financial U.S.

A.M. Best Company # 07101 (Sun Life Assurance Company of Canada)

Distribution: National sales force, brokers, third-party administrators and direct

For ratings and other financial strength information about these companies, visit www.ambest.com

What Is Stop-Loss?

Medical Stop-Loss: Insurance purchased by employers with self-funded health plans to cover expensive, catastrophic claims.

Specific (or Individual) Medical Stop-Loss: Protects employers from individual catastrophic claims. For instance, the policy could be triggered by any claim over a set limit, say $100,000. Anything over the $100,000 would be paid for by the stop-loss policy.

Aggregate Medical Stop-Loss: Protects employers from higher-than-expected usage from the entire group. For instance, if the policy was set to trigger at an aggregate limit of $200,000, two $100,000 claims would trigger the coverage.

Excess of Loss Reinsurance: Similar to medical stop-loss, excess of loss is a contract between two insurance companies--in this case, a reinsurer and a health insurer, which could include a health maintenance organization--where the reinsurer promises to pay catastrophic claims higher than a set amount.

Carve-Out Program: Insurance that covers a particular type of risk, such as a transplant, entirely so the insured, be it an employer or HMO, has no retention or deductible to pay. The carve-out insurer would handle all claims and costs associated with the case.

Lasering: Raising the premium or deductible on an employer's medical stop-loss coverage on specific high-risk individuals.

The Estimated Costs of
Organ Transplants in 2005

Organ transplants are some of the
costliest claims for medical stop-loss
writers.

                             Total Estimated         Estimated
                                   Number of        First-Year
Transplant                       Transplants    Billed Charges

Heart Only                             1,960          $478,900
Single Lung Only                         674           299,900
Double Lung Only                         531           508,200
Liver Only                             5,979           392,800
Kidney Only                           16,149           210,000
Pancreas Only                            569           270,800
Intestine Only                            58           813,600
Heart-Lung                                38           640,800
Kidney-Heart                              46           588,400
Kidney-Pancreas                          885           293,100
Liver-Intestine                           47           830,200
Liver-Kidney                             289           515,400
Liver-Pancreas-Intestine                  48           885,600
Pancreas-Intestine                         6           832,100
Other Multi-Organ                         18           737,400
Bone Marrow--                          9,630           219,300
  Using patient's
  own marrow
Bone Marrow--                          4,840           386,300
  Using marrow from
  patient's relative
Bone Marrow--                          2,420           481,900
  Using marrow from
  unrelated donor
Cornea                                32,840            19,100

Source: Milliman Consultants and Actuaries