If you’re a small to medium-sized employer with a smaller benefits budget, you may choose to offer a self-funded health plan to control rising healthcare costs and lessen your financial risk. While self-funded plans are more flexible than traditional employer-sponsored health insurance, the risk of costly catastrophic claims could leave your company financially strapped.
That’s where stop-loss insurance comes in. This type of insurance protects you from paying excess healthcare costs under your self-funded plan so you can continue providing your employees full coverage for their eligible expenses. But how do you know if it’s right for your company?
In the sections below, we’ll take you through the types of stop-loss insurance, their pros and cons, and what you need to consider before implementing stop-loss insurance at your organization.
What is stop-loss insurance?
Stop-loss insurance, or excess insurance, is insurance purchased by employers with a self-funded health plan. It’s designed to protect employers against catastrophic or surprise expenses, or “losses.” Unlike an employee insurance plan, stop-loss coverage only insurers the employer—it doesn’t cover employees or their dependents.
Let’s break this down a little further. Under a fully-insured health plan, medical claims are paid by an insurance company in exchange for monthly premium payments. With a self-funded plan, the employer must pay all eligible claims an employee incurs while covered under the health plan.
However, stop-loss insurance protects employers against medical claims over a predetermined amount, which typically is the point where the claims are considered excessive.
This way, employees still receive the coverage they need, and employers are protected financially against unexpected healthcare costs.
How does stop-loss insurance work?
stop-loss insurance is typically written through a trust. An employer who applies for stop-loss insurance and is accepted becomes a participating employer in the trust and is given a plan document outlining the policy’s benefits.
Now, let’s get to how claims are paid under this coverage. stop-loss insurance payouts are provided on a reimbursement basis. You’re responsible for paying all your employees' losses while they’re on your plan.
After the losses are paid, you’re reimbursed for the amount of the loss that exceeded the deductible, or predetermined amount. Reimbursements always go directly to you—employees, dependents, or medical providers don’t receive any reimbursements.
Expenses must meet the following criteria to be considered for reimbursement by your insurance carrier:
- The expense must be listed as eligible in your benefits plan document and approved
- The loss must be covered under the loss definition in the policy
Your plan document is critical to outlining your financial liability. For example, a stop-loss carrier may have policies that don’t allow reimbursement for certain expenses. This can create significant liability for you, so take advantage of the policy’s flexible plan design opportunities to carefully create and review your plan document.
What are the two types of stop-loss insurance?
There are two types of stop-loss coverage available for employers. You can choose to have only one type of coverage, but many employers prefer to protect themselves with both. In the below sections, let’s go over how each type can work for you and your employees.
Specific stop-loss insurance
Specific, or individual, stop-loss insurance provides employer protection for an individual employee’s—and any dependents’—excessive medical costs. Under this policy, employers can receive reimbursements for medical services, prescription drugs, or both.
With individual stop-loss insurance, you set a maximum liability amount per employee in your benefits plan. If any claims from individuals go over that amount, the policy reimburses you for the excess.
For example, if you set your liability cap at $150,000 per person for the policy year, and a participant’s total eligible claims come to $158,000, your policy will reimburse you $8,000.
The maximum liability amount per person can range anywhere between $10,000 to $1 million. However, the maximum liability your carrier is willing to take on will be outlined in your policy’s contract terms.
Aggregate stop-loss insurance
Aggregate stop-loss insurance covers excessive medical claims for all employees during a policy year. Medical, dental, vision, prescription drugs, and short-term disability can be covered under this type of insurance.
With this coverage, you’re reimbursed if your employees’ aggregate claims exceed your predetermined threshold, or aggregate attachment point.
The aggregate attachment point is the maximum amount of claim liability for your entire group of employees. This amount is determined based on aggregate factors but typically comes to about 125% of expected medical claims for the year.
The aggregate attachment point level is calculated according to the following factors:
- You and your insurer determine the average expected claims per employee, per month.
- This amount is multiplied by a percentage between 125% and 175% to generate a margin.
- The final amount is then multiplied by your plan’s monthly enrollment to get the aggregate attachment threshold, or monthly deductible limit.
The monthly deductible will usually vary as your plan’s enrolled employees change. With an annual deductible, the amount you pay is based on initial monthly estimates during coverage which are then totaled up for the year.
However, many policies offer annual deductibles that are a little lower than the totaled yearly deductible amount.
What are the pros of stop-loss insurance?
If you have a self-funded health benefit plan, or are thinking about getting one, there are many advantages to adding a stop-loss insurance policy to your plan.
Some pros to having stop-loss insurance are:
- Financial stability: You’re protected from the financial liability of high-cost claims.
- Potential for low financial risk: If your employees and their families are generally healthy, annual claims decrease, creating a lower risk for your company.
- Flexibility: Specific and aggregate policies can be used as individual coverage or bundled together. They can either be added to your current health plan or purchased separately from a third-party insurer.
What are the cons of stop-loss insurance?
Even with all its advantages, some employers may see potential downsides to incorporating stop-loss insurance at their company.
Some cons to having stop-loss insurance are:
- Initial payments: You’re reimbursed for excess medical claims, but you’re responsible for the claim’s initial payment. If you don’t have money in your budget for potential claims, you may wind up in financial distress.
Coverage limits: Many stop-loss insurance policies have coverage limits. So if you’re a larger self-insured employer who uses your policy frequently, you may not be able to receive loss reimbursements for all the claims you paid out.
Do I need stop-loss insurance with an HRA?
If you have a self-funded plan, like a health reimbursement arrangement (HRA), your employees can get reimbursed, tax-free, for their health insurance premiums and other out-of-pocket medical expenses. However, HRAs offer employers more cost-predictability than other self-funded plans, so you may not need stop-loss insurance with this type of benefit.
HRAs financially benefit employers because you can set an allowance that works for your budget. Employees can use their allowance to pay for their medical expenses, but they can only be reimbursed up to their allowance amount.
Additionally, employers only reimburse employees when an eligible expense is submitted and approved—HRA dollars stay with the employer until then.
HRAs can be a simple and budget-friendly way to offer a meaningful health benefit to your employees with low risk to your company, negating the need for stop-loss insurance while keeping your employees satisfied.
Is stop-loss insurance right for your company?
Before getting a self-funded insurance plan and stop-loss policy at your organization, you should consider your employees’ health and potential financial risk.
If your workforce is generally young, healthy, and single, a self-funded plan, your financial risk for costly claims will likely be much lower. And if an employee does have a health emergency, your stop-loss coverage can bridge the gap as needed without breaking the bank.
However, if your workforce is mainly comprised of older individuals with families, the frequency of claims may be much more significant. In this case, you might decide that waiting for reimbursements isn’t worth the initial, expensive claim payouts.
If you decide you have the financial strength for stop-loss coverage, compare policies at multiple insurers before you choose one. Companies with self-funded health plans typically purchase both specific and aggregate coverage, and stop-loss premiums and benefits can vary.
Although, as with any other insurance policy, you have the option to make changes at the end of the contract period. For example, if you didn’t get close to hitting your deductible one year, you can lower the deductible or drop the coverage altogether. Or, if you were frequently exceeding your deductible, you can raise your maximum liability amount for the next policy period.
stop-loss plans have a certain amount of flexibility, but it’s still important to review your policy each year with your broker to make adjustments based on you and your employees’ needs.
Conclusion
stop-loss insurance can be an attractive option if you have a self-funded health benefit plan at your organization. It can help you combat rising medical costs, and lower your company’s financial liability.
The right stop-loss coverage can make or break a self-funded health plan. That’s why educating yourself on stop-loss insurance will set you up for success. Speak with an insurance broker to help you understand your employees’ healthcare needs and your company’s potential financial risk before you get started.
