The 14% Renewal: MLR Rebate, Self-Funding, and a New State Mandate
Northline Fabrication is a metal-stamping company in Ohio with 120 full-time employees. It has been fully insured with the same carrier for six years under a large-group policy with a $2,000 individual deductible and an 80/20 coinsurance split. At renewal the carrier quotes a 14% increase, from $12,000 to $13,680 per employee per year, or $1,641,600 total. The broker obtains the carrier's most recent experience summary: incurred claims of $1,050,000 and quality-improvement spending of $18,000, against $1,440,000 in premium earned; state premium tax and regulatory fees total 3% of premium. Only two employees generated claims above $150,000 (one at $410,000, one at $228,000). The broker proposes moving to self-funding with a $150,000 specific stop-loss attachment and a $2 million aggregate attachment. The CFO wants to know whether the MLR rebate the company received last year was a coincidence, whether self-funding is financially sound, and what happens if the state legislature adds a new benefit mandate next session.
1. Compute Northline's medical loss ratio from these figures and explain what the result does and does not tell the CFO about the size of the renewal increase.
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Formula. MLR = (incurred claims + quality improvement) ÷ (premium earned − state premium tax and regulatory fees).
- Numerator: $1,050,000 + $18,000 = $1,068,000
- Denominator: $1,440,000 − (3% × $1,440,000 = $43,200) = $1,396,800
- MLR = $1,068,000 ÷ $1,396,800 = 76.5%
Rebate. The large-group threshold is 85%. Rebate = (85% − 76.5%) × $1,396,800 ≈ $119,000. The employer received a rebate last year because the carrier, in aggregate, spent far less than 85 cents of each premium dollar on care.
What it does not tell him. Rebates are calculated on the carrier's entire Ohio large-group book, not on Northline alone, so a group-level MLR is only directional. A single $410,000 claimant can swing a 120-life group's experience dramatically; the carrier pools that volatility across thousands of lives, which is precisely the risk the employer would assume by self-funding.
Use in the negotiation. A 76.5% MLR against a 14% increase suggests the renewal contains trend and margin loading beyond this group's own claims. The CFO should demand the carrier's trend assumption, the pooled/statewide rate, and a comparison of the quoted rate to the manual rate before treating 14% as inevitable.
2. Evaluate the self-funding proposal: what risk is transferred, what risk is retained, and what should the CFO require before signing?
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Risk retained. Northline funds claims from month to month. Expected claims of roughly $1.05M against $1.64M of current premium looks attractive, but that expectation is built on one year with two outliers. The $150,000 specific attachment means the plan absorbs the first $150,000 of every claimant's cost - with 120 employees, several mid-size claims ($40,000–$90,000) in one year is entirely plausible, and the aggregate attachment at $2 million only protects against catastrophic years.
Risk transferred. Specific stop-loss covers the excess over $150,000 per person, so the two large claimants would generate roughly ($410,000 − $150,000) + ($228,000 − $150,000) = $338,000 of reimbursement in a repeat year.
Hidden costs and hazards.
- TPA and network access fees, plus stop-loss premium.
- A claims reserve, typically one to three months of expected claims (roughly $90,000–$260,000 here).
- Lasers: after a bad year the stop-loss carrier can exclude or surcharge a specific individual at renewal, leaving the plan exposed to exactly the claimant it most needs covered.
- Annual re-rating of the specific attachment; a bad year often raises it.
- ERISA fiduciary exposure: the employer becomes the plan fiduciary and must produce an SPD, Form 5500, and COBRA administration.
Savings. Escape from state premium tax (2–3%, roughly $35,000–$50,000 here) and from state benefit mandates, plus retention of any margin instead of an 85% MLR floor.
Recommendation. With two outliers in a 120-life group, self-funding is defensible only with a funded reserve, a specific attachment no higher than $75,000–$100,000, and a written exit strategy back to fully insured.
3. The Ohio legislature enacts a mandate requiring coverage of applied behavior analysis for autism. How does Northline's obligation differ as a fully insured versus a self-funded plan, and what other consequences follow?
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Fully insured. The policy is a contract of insurance subject to Ohio insurance law, so the carrier must add the benefit and price it into the renewal. Northline has no choice but to buy the mandated benefit (the state may offer a mandate-light alternative for small employers, but at 120 employees Northline is a large group and generally has no such out).
Self-funded. ERISA preempts state laws that relate to employee benefit plans, and the saving clause preserves state regulation only of insurers. A self-funded plan is not an insurer, so it is generally not required to add the state mandate. That is one of the principal savings the broker is selling.
But the savings come with conditions.
- The stop-loss carrier may contractually require the plan to comply with state mandates as a condition of coverage, which functionally restores the obligation.
- The plan document and SPD must describe what is and is not covered; an employee who assumes the benefit exists and is denied has a claims-procedure and public-relations problem, not just a legal one.
- Any mid-year reduction in benefits requires advance participant notice (60 days for material reductions), and the Summary of Benefits and Coverage must be updated.
- If the plan ever shrinks below the large-group threshold or buys a fully insured product, the mandates snap back.
The CFO should treat mandate avoidance as a real but partial benefit, not a guarantee.