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The Differences Between Short- and Long-term Disability Insurance and COBRA
Voluntary benefits are becoming increasingly important to employees as they focus on their physical, mental, social and financial health. As a result, many employers have expanded their voluntary benefits offerings to address employees’ needs and improve their attraction and retention efforts.
Among these offerings are disability benefits, which can provide guaranteed income or job protection to employees who are unable to work due to serious illness or injury. The most common disability benefits are short-term disability (STD) and long-term disability (LTD) insurance. However, understanding the differences between STD and LTD benefits and other laws, such as the Consolidated Omnibus Reconciliation Act (COBRA), can be complicated and difficult for employers to navigate.
This article provides a general overview of STD, LTD and COBRA and explores how both types of disability insurance differ from COBRA.
What Are STD and LTD?
STD and LTD insurance are the most common forms of disability benefits.
Short-term Disability Insurance
STD insurance replaces all or a portion of an employee’s income due to a temporary disability. Under STD plans, employees receive a percentage of their income, typically 40% to 70% of their base pay, but employers can allow employees to supplement their STD benefits with paid sick leave or other benefits. An STD insurance policy is paid either fully or partially by the employer, and the median length of STD insurance coverage is 26 weeks, according to the U.S. Bureau of Labor Statistics.
To qualify for STD insurance, an employee files a claim under their insurance policy. The employee must prove their illness or injury qualifies as a disability under the plan’s terms. STD insurance generally requires employees to wait for a short period—on average, seven days—before they start receiving benefits to discourage abuse and because many employers’ paid-time-off benefits cover shorter absences than those covered by STD insurance. While STD insurance plans do not guarantee job protection, employees may be entitled to it through their employers’ policies or under state and federal laws, such as the Family and Medical Leave Act.
Employers offer STD insurance because it helps employees remain financially stable while recovering from an illness or injury, allowing them to stay productive and focused when they’re physically able to return to work. Since the income employees receive under STD insurance is paid by insurance companies, employers have the financial resources and flexibility to hire temporary or contract workers to fill workforce gaps without experiencing high labor costs. In states that don’t require employers to participate in disability income plans, employers can offer full, partial or noncontributor STD insurance plans.
Long-term Disability Insurance
LTD insurance provides employees with income for long-term illnesses and injuries. Employees generally receive 60% to 80% of their base pay; however, some employers’ LTD plans offer more limited income replacement benefits. Similar to STD, employees receive income benefits until they are able to return to work or have exhausted policy limits. LTD benefits requirements tend to be more rigorous than STD because workers need to demonstrate they’re unable to perform any job, not just the job they were working before the illness or injury.
These plans often work together with STD, so when an employee exhausts their STD benefits, LTD benefits continue to provide the employee with income. As with STD benefits, LTD does not provide workers with job protection. Employees who become permanently disabled may continue to receive LTD benefits through their retirement date or until they’re eligible for Social Security disability benefits.
What Is COBRA?
COBRA allows individuals to continue their group health plan coverage in certain situations. This law requires group health plans maintained by private-sector employers with at least 20 employees to offer continuation coverage to covered employees and dependents when coverage would otherwise be lost due to certain specific events. These events include the following:
- Death
- Termination
- Reduction in employment hours below the plan’s eligibility requirements
- Divorce or legal separation
- Medicare eligible
- Child’s loss of dependent status under the plan’s rules
COBRA sets rules for how and when continuation coverage must be offered, how employees and their families may elect continuation coverage, and when continuation coverage may be terminated. Employers may require individuals to pay for COBRA coverage. Group health coverage for COBRA participants is usually more expensive than coverage for active employees because many employers pay a portion of the premium for active employees.
COBRA continuation applies to plans that qualify as group health plans as defined by the Employee Retirement Income Security Act (ERISA). Under ERISA, a group health plan must be a plan, fund or program that is established or maintained by an employer and has the purpose of providing medical care. Health insurance plans, self-funded health plans, health maintenance organizations and prescription drug plans generally meet ERISA’s criteria for a group health plan. Medical care is defined as care for the diagnosis, cure, mitigation, treatment or prevention of disease and any other undertaking affecting any structure or function of the body.
The Differences Between STD and LTD and COBRA
An employer is not required to offer COBRA continuation on a voluntary benefits plan if the plan does not qualify as a group health plan and the plan is considered completely voluntary. STD and LTD benefits generally provide income replacement for individuals who must take a leave of absence from work due to a qualifying condition instead of medical care. Because STD and LTD typically do not provide medical care, they’re not subject to COBRA and would not be required to continue under COBRA. However, although uncommon, if an STD or LTD insurance provided medical care, it may be considered a group health plan under COBRA and subject to continuation coverage.
While STD and TLD benefits are generally not subject to continuation coverage under COBRA, an employee’s disability can initiate COBRA requirements if it produces a qualifying event. For example, if an employee becomes disabled and doesn’t return to work at the end of their disability leave or notifies their employer of their intent not to return, the employer’s plan will determine whether this is a qualifying event. If this is determined a qualifying event, COBRA requires the employer to notify the employee of their COBRA rights and provide the employee with the option to continue group health insurance coverage.
Summary
STD and LTD benefits can provide sick and injured employees with financial stability and peace of mind when they’re unable to work. Understanding how these types of disability insurance differ from COBRA can help employers stay compliant and ensure employees have the benefits they need and desire.
This Benefits Insights is not intended to be exhaustive nor should any discussion or opinions be construed as professional advice. © 2023 Zywave, Inc. All rights reserved.
A Primer on Medical Stop-loss Insurance
Catastrophic and unexpected health care claims are on the rise. This increase in catastrophic claims is, in part, the result of medical and pharmaceutical advances, such as specialty drugs and cell and gene therapies, as well as medical price inflation. As a result, many employers with self-funded health plans are actively looking for ways to minimize their financial exposures to potentially catastrophic claims. A common strategy these employers have leveraged is purchasing stop-loss insurance.
What Is Stop-loss Insurance?
Generally speaking, stop-loss insurance helps self-funded employers protect themselves from higher-than-anticipated health claim payouts by limiting their exposure to employee medical claims that exceed a predetermined amount. In other words, such coverage can prevent abnormal claim frequency and severity from draining employers’ financial reserves.
Stop-loss insurance plays an important role in helping employers manage their health care costs and protecting against unexpected or catastrophic claims, as it sets a ceiling for the amount they pay in health claims. This coverage is not a form of medical insurance, but rather a policy employers can purchase to manage their financial risks.
How Does Stop-loss Insurance Work?
Under a stop-loss insurance policy, an employer’s claims liability is limited to a certain amount (also called an attachment point), therefore ensuring abnormal employee health claims do not drain the employer’s financial reserves. An employer can add stop-loss insurance to an existing plan or purchase it independently.
If an employer’s health claims exceed a predetermined amount, their insurer will usually reimburse them for all additional claims. For example, if an employer has a stop-loss insurance policy with an attachment point of $500,000, their insurer will typically begin providing reimbursement after the plan’s claims exceed $500,000. It’s worth noting that since stop-loss coverage only reimburses an employer for claims that exceed their policy’s attachment point, the employer is initially responsible for paying employee claims before they reach the established cost ceiling.
Types of Stop-loss Insurance
There are two types of stop-loss insurance: individual (or specific) and aggregate (or total claims). Understanding the difference between individual and aggregate stop-loss insurance can help self-funded employers evaluate and determine which coverage best meets their needs and reduces their financial exposures. Because health plan usage can be unpredictable, some employers choose to purchase both individual and aggregate stop-loss insurance to provide their organizations with maximum financial protection.
Individual Stop-loss Insurance
Individual stop-loss insurance limits an employer’s liability when an individual employee’s medical claims exceed the attachment point. As such, this coverage can protect employers against unexpectedly high claims from individual employees.
Aggregate Stop-loss Insurance
Aggregate stop-loss insurance can help safeguard employers from the total sum of health claims for an entire group of employees rather than any one individual. Under this coverage, an employer is usually reimbursed when their expenses for all employees’ medical claims exceed the attachment point for the plan year.
Stop-loss Insurance Considerations
Each organization is unique. Deciding whether stop-loss insurance is necessary depends on an organization’s specific needs, workforce characteristics and risk tolerance. Reviewing all relevant factors (e.g., rates, policy terms and potential exposures) can help employers decide whether purchasing this coverage makes sense. Employers can consider the following factors when evaluating whether to purchase stop-loss insurance.
Understanding the Attachment Point
The attachment points for individual and aggregate stop-loss insurance differ. Generally, the attachment point for an individual stop-loss policy is a specific dollar amount. As a result, an employer is only responsible for an individual employee’s claims up to that amount.
For aggregate stop-loss insurance, the attachment point is usually a percentage of expected claims. The typical attachment point for aggregate stop-loss insurance tends to be between 120% and 125% of expected health claims. In any case, a stop-loss insurance policy’s attachment point can vary depending on factors such as the employer’s size, employee demographics and overall risk profile.
Evaluating Coverage Limitations
Stop-loss insurance plans are medically underwritten; therefore, an insurer may refuse to cover certain conditions or require higher claim thresholds for those conditions. For example, if a plan enrollee consistently has high-cost claims, a stop-loss insurer may refuse to continue to cover that enrollee or require a higher claim threshold for the enrollee. This practice is known as lasering.
Additionally, since stop-loss contracts typically last for one year, an employer’s high-cost claimants may only be covered for a few months before the insurer excludes them from the policy upon renewal. Thus, the employer will likely be financially exposed to those claims the following year.
Monitoring Increasing Costs
While stop-loss insurance can help employers reduce their financial exposures when health claims are higher than anticipated in a given year, the cost of such coverage can increase annually. Rising claims can also make it more difficult to obtain rates from other providers.
Ensuring Stop-loss Coverage Aligns With Health Plan Provisions
Some stop-loss policies may exclude certain medical treatments or classes of individuals covered by employers’ health plans. Consequently, employers may be on the hook for expensive claims that aren’t covered under their stop-loss policies. Therefore, employers should consider reviewing their stop-loss policies and health plan provisions to ensure they align to limit their potential financial exposures.
Summary
Selecting the right insurance policies can have major financial repercussions for employers. Having sufficient coverage can lower employers’ insurance costs, reduce their risks and keep their workers healthy. Stop-loss insurance can make all the difference in helping employers mitigate their financial risks, especially as catastrophic health claims are increasing. Understanding stop-loss insurance will allow employers to make the best policy decisions for their respective organizations.
| This Benefits Insights is not intended to be exhaustive nor should any discussion or opinions be construed as professional advice. © 2023 Zywave, Inc. All rights reserved. |
Cost Mitigation Strategies as Health Care Costs Continue to Rise
In 2023, organizations face the difficult task of reining in rising costs and keeping employee coverage affordable while trying to remain attractive to current and prospective talent despite their shrinking budgets. Industry experts project a 6% to 8% increase in employers’ health care costs in 2023. Employers may see a greater increase should they fail to take effective action to curb rising costs, such as expanding telemedicine options and digital health care resources. These efforts are further complicated by record-high inflation, marketplace consolidation and ongoing labor market issues. As employers brace for further health care cost hikes in 2023, they are desperately searching for solutions to manage their growing costs and address the long-term impacts of these increases on their organizations.
There are several reasons why employers’ health care costs are increasing. While most employers experienced reduced claim costs during the COVID-19 pandemic, medical plan costs have begun returning to pre-pandemic levels as health care utilization rebounds, outplacing inflation and wage increases. Utilization has especially increased for employees dealing with severe chronic diseases and late-stage cancer due to missed or delayed care during the pandemic. Further, some employees are facing long COVID-19. Even employees who recovered from COVID-19 are experiencing cardiovascular and neurological diseases, causing employers’ health care costs to increase. In addition, rising expenses among medical providers and specialty and novel prescription drugs are exacerbating employers’ health care costs. The projected annual costs trend for outpatient prescription drugs is expected to approach double-digit levels—the highest rate since 2015— due to price increases and new specialty drugs.
Inflation is also causing health care costs to rise, and it will likely drive up costs moving forward. Additionally, there’s been an increase in hospital closures, physician retirements and health care worker quits. In fact, 3% of health care workers quit each month of 2022, according to the U.S. Bureau of Labor Statistics. The recent trend of consolidation among hospitals, physician practices and commercial insurers is also triggering higher health care prices for private insurance. Altogether, these developments are putting further pressure on the health care system and causing costs to increase.
Planning is critical for employers to develop cost-saving strategies in 2023. Traditionally, many employers have addressed rising health care costs by shifting a greater share of costs onto their employees. While some employers plan to stick with this strategy, savvy employers will recognize the potential chilling effect this can have on recruiting efforts due to the state of the labor market. Employers should understand that employees are already financially strained due to inflationary pressures. However, employers’ budgets may be limited, so increased health care spending will likely restrict spending elsewhere. In 2023, employers should be open-minded regarding strategies that could help manage their health care costs while attempting to improve affordability for employees, such as investing in telemedicine or incentivizing employees to seek cost-effective care options. Some organizations are negotiating with providers, as some carriers are currently offering discounts and reduced management fees. Other cost mitigation strategies include:
– Modifying health plan designs—Rising health care costs are causing employers to reevaluate their health care plan designs and offerings to include cost-reducing features. Some employers might even consider shifting to self-funded or partially self-funded plans in search of cost effectiveness. Additionally, employers are using health reimbursement arrangements and/or health savings accounts to incentivize employees to make cost-effective health care choices. Many organizations are also implementing wellness programs to improve the overall wellbeing of their workforce by encouraging individuals to exercise daily, eat a balanced diet, reduce stress and visit the doctor as needed.
-Incorporating health care analytics—Employers are increasingly relying on health care data to understand potential cost drivers and underlying claims. These data analysis initiatives include claims audits, utilization analysis, data warehousing and predictive modeling. Many employers are using claims and diagnostic information to establish and measure workforce wellness initiatives in an effort to control health care costs. By gathering data and using it to predict where and when increased costs may occur, employers can determine the best strategies to address growing health care costs.
-Improving employees’ health care literacy—Health care literacy initiatives are leading employers’ cost-saving strategies in 2023. Improving employees’ health care knowledge is vital to building a healthy and resilient workforce and reining in overall health care costs. More informed employees are increasingly likely to reduce health care costs by making better care choices. For example, employers are guiding employees to in-network providers so they can avoid unnecessary out-of-network care, thus reducing overall medical expenses for both parties. Many employers are also creating user-friendly benefits portals to educate employees and provide them with critical information, such as health plan options, forms, enrollment calendars and links to additional health care resources.
Rapidly increasing health care costs will likely continue to impact employers for the foreseeable future. Savvy employers will look to implement effective strategies now to rein in these costs and keep employees healthy. Employers who proactively implement strategies to address rising health care costs will be better positioned to meet their employees’ needs and find long-term solutions to mitigate costs.
© 2023 Zywave, Inc. All rights reserved.
Consociate Health names Mike Castleberry as Chief Growth Officer
Castleberry has proven track record of building strategic partnerships to drive results for clients.
Decatur, IL., – Consociate Health, a national Third-Party Administrator of employee benefit plans, announced today that Mike Castleberry has been named Chief Growth Officer (CGO). Castleberry will be responsible for leading the company’s corporate development efforts to grow revenue and expand market channels and market share.
Castleberry brings 30 years of industry experience in leadership, growth, strategy, and product development. His diverse corporate exposure at Prudential, Aetna, WellPoint Anthem, HealthSCOPE Benefits and most recently at Pareto Captive Services, will strengthen Consociate Health’s leadership team and its strategic partnerships with consultants across the nation.
“Over the last several years, Consociate has achieved pivotal growth and success, and the company enjoys excellent relationships with its clients, consultant partners and its employees,” says Castleberry. “I look forward to building on this success and working with the team as we execute new growth initiatives and corporate strategy.”
“Consociate has been fortunate to experience significant growth because of our focus on results for our clients and our culture that supports that mantra. They are an outstanding group of individuals, dedicated to our mission of improving the lives of our customers and those in the communities we serve. We are excited to welcome Mike to our team. He is highly respected across the industry and brings incredible expertise in growth strategy and best-in-class processes to manage this planned growth,” said Consociate Health President Darren Reynolds.
About Consociate Health
For more than 40 years, Consociate Health has partnered with consultants and employers of all sizes to deliver employee benefit program administrative services. As a Third-Party Administrator (TPA), Consociate has built a reputation for delivering results to its clients, leveraging innovation through cost containment, technology and direct-to-employer network development while providing empathic customer service with a focus on helping those we serve.