While stop-loss coverage has become an increasingly popular tool for self-insured employers, it’s still a topic of confusion for many people. The purpose of stop-loss coverage is to provide a layer of financial protection for employers self-fund their health coverage, capping the amount that the employer will have to pay for medical claims its covered members incur. Including a stop-loss provision as part of an employee health plan helps a self-insured employer control its healthcare costs while still providing the high-quality medical coverage its employees want. Two primary types of stop-loss policies exist, aggregate and specific, and employers typically use both types to give themselves maximum financial protection.
How does a stop-loss policy work with self-funded insurance?
With fully-funded health insurance, the employer pays set premiums to an insurance carrier, which then pays for claims the employer’s covered members incur. The employer may end up paying more in premiums and fees than their members actually spend on claims. Fully-funded insurance plans also tend to be restrictive since they’re designed to accommodate thousands and thousands of covered members from many different businesses. If you’re the employer, a fully-funded insurance plan may not serve your specific employees’ wants and needs.
Self-funding is an alternative way for an employer to provide health coverage. Instead of paying premiums to an insurance carrier, the employer creates a fund that it uses to pay its members’ claims directly. This system can work well as long as employees and their covered dependents stay mostly healthy and their claims are low, but catastrophic claims can wipe out the fund.
Self-insured employers use stop-loss insurance to cover claims above a certain dollar amount. An employer with a stop-loss policy pays premiums to a stop-loss carrier and the carrier agrees to pay for claims above a certain threshold, after a deductible and coinsurance have been paid.
There’s a lot of flexibility around how self-insured employers structure employee health benefits, and there are a lot of factors that affect how much they pay for stop-loss coverage. For example, how young and healthy is the workforce overall? Stop-loss carriers use census data about an organization’s employees to determine rates and terms. An employer with a largely young and healthy workforce may pay less for stop-loss coverage than an employer with an older workforce, since older employees are generally more likely to need expensive medical care. Employers can also take advantage of cost-saving strategies like lasering, which assigns a higher deductible to specific employees who are likely to have higher-than-average medical claims.
Types of Stop Loss Insurance
There are two primary types of stop-loss coverage. Self-insured employers commonly have both aggregate and specific stop-loss policies for maximum protection against high-cost claims.
Aggregate Stop Loss
Aggregate stop loss creates a cap on how much the employer will be obligated to pay for all of its claims across a full plan year. The employer and stop-loss carrier establish an aggregate attachment point, which is essentially the dollar amount past which the stop-loss coverage kicks in. Say an employer has an aggregate attachment point of $1 million, but its employees incur $1.3 million in total claims during a given plan year. The stop-loss carrier would reimburse the employer for the $300,000 in excess of its cap.
Specific Stop Loss
Specific stop loss creates a cap on how much the employer will pay for any one individual’s claims. Specific stop loss insurance becomes very important when an insured individual incurs a big medical expense. Say an employee covered by a self-funded health insurance plan has a child diagnosed with leukemia. It’s one of the most expensive conditions to treat, holding the number two spot on the list of top high-cost claims in the most recent Sun Life Claims study. The average cost to treat leukemia was around $250,000 (using 2016-2019 data), with the highest claim costing $2.7 million. If the patient incurs $250,000 in claims and the employer’s specific stop-loss policy has a $100,000 deductible, the employer would pay the first $100,000 and the stop-loss policy would cover the next $150,000. The patient gets the treatment they need, while the employer’s healthcare fund isn’t decimated by a single high-cost claim. Win-win.
Stop Loss Insurance Brokers, Inc. is your source for information about all things related to self funding. We are here to answer questions you have about stop-loss provisions, switching from fully-funded to self-funded insurance, or whatever else you may be wondering about around health insurance plans. Contact us today!