Beacon

• Co-Founder, Managing Director, Simplesurance, embedded insurance: operates in ~30 countries, raised $80M, acquired by Allianz
• Founder, Crowdspan, first US solution to bind multiple home insurers online: a partnership with Blackstone Group’s mortgage originator, Finance of America
• Head of Product, Semsee, DE Shaw-incubated SaaS provider for commercial multicarrier quoting
• Head of Product, Resilient, no-cost term life insurance for 1099 workers

• E-Commerce Solutions Architect, Advance Auto Parts
• Founder, among.io, iOS app for anonymous cross-company chatter
• General Manager, Nexergen, energy efficiency technology provider
• Principal, Green Partners, energy efficiency private equity / venture studio
• Associate, Morgan Stanley Technology

Like stop-loss insurance, Gap coverage carves a homogenous segment out of a diverse risk pool so that it can be managed more cost-efficiently. However, while stop-loss addresses the "long tail" of the medical claims distribution by covering rare, high-cost claims above a set threshold, Gap focuses on the "short tail" by covering frequent, lower-cost claims below a set threshold (the employee MOOP).

Because Gap is capped, it has no long-tail exposure, enabling it to cover more short-tail risk per dollar than medical insurance. This allows employers to offer health plans with higher cost sharing, which they can then offset with Gap, resulting in medical+Gap bundles with a lower total costs of coverage and with lower employee cost sharing.

Moreover, Gap provides employees with greater financial certainty, stimulating their healthcare utilization. This, in turn, smooths out the group's claims experience and reduces its long-tail variance (and thus, long-tail costs), as fewer employees delay or forgo care due to financial concerns.

Gap is highly flexible, because it offers variable coverage floor and ceiling amounts. Each employer can decide how much of a medical plan's cost sharing to indemnify, for instance, by eliminating cost sharing entirely, or leaving a deductible in place, or providing some first-dollar coverage (for example, to cover the deductible) and leaving a "corridor".

Compared to a PPO plan with cost sharing, bundling Gap with an experience-rated high-deductible health plan should be able to eliminate cost sharing and still reduce medical costs by 10-20% for most employee groups. The savings potential is more varied in community-rated groups due to their different structure (see below).

Before the ACA, medical carriers frequently bundled medical plans with supplemental coverage to reduce costs. Since their core business generated the very data needed to administer Gap coverage, payers could seamlessly allocate funds between both plans in the background. As a result, most people never even realized when they had dual coverage.

At the time, though, the quality of medical plans varied widely, and many insurers used supplemental plans as wrappers to mask skimpy medical benefits. To curb this practice, the ACA's 2014 Safe Harbor regulations required that, in order to be excepted from ACA rules, supplemental coverage must be provided by an insurer that is not the primary medical insurer.

This essentially ended payer-based supplemental coverage and shifted Gap to non-medical insurers. However, these insurers not only lack access to the medical billing data required to administer Gap coverage, but they are also not operationally equipped to support indemnity coverage or high-frequency claims, having spent decades focused on high-severity fixed indemnity products with low claims frequencies.

Since 80–90% of medical claims involve cost sharing, exclusion-free Gap insurance would closely mirror the claims frequency of the underlying medical plan. This is not only many magnitudes higher than what non-medical insurers typically handle, but it is also so high that it would be challenging to scale Gap's manual setup to a large pool of insureds. Unsurprisingly, insurers usually outsource Gap administration entirely to Third-Party Administrators (TPAs).

In the absence of automation, the only way insurers can control claims is by limiting what Gap covers (i.e. favoring fixed-indemnity designs) and by continuing to rely on high-friction workflows that discourage claims from being filed in the first place.

Because the market of community-rated employers willing to tolerate this status quo is large and ever-growing, there is little incentive to change. But for the broader market, i.e. employers that demand better processes and real consumer value, legacy Gap products simply don't meet the bar. As a result, most of the country has no real access to Gap coverage.

When it comes to its target markets, Gap faces a Catch-22:

Gap excels when differences in medical plan costs are driven by cost sharing rather than network type. This is typical with experience-rated plans where High Deductible Health Plans (HDHPs) are often part of the insurer's Preferred Provider Organization (PPO). However, Gap is a tough sell to experience-rated employers, since they dislike its porous coverage, which confuses employees and weakens indemnification, and its manual administration, which leads to a poor employee experience and frequent claims process troubleshooting by HR.

For small (i.e. community-rated) employers, Gap's cost-saving potential often outweighs its drawbacks. However, community-rated plans do not offer a lower-cost, wide-network option like an HDHP. Each network type also includes multiple metal tiers, allowing for more granular pricing options within. As a result, small employers face a trade-off: bundling Gap with a PPO plan preserves provider access but limits cost savings, while bundling with an HMO plan maximizes savings but reduces provider access.