If you’re a small to medium-sized employer with a smaller benefits budget, you may be inclined to offer a self-funded health plan to control rising healthcare costs. 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. It protects you from paying excess healthcare costs under your self-funded plan so you can provide your employees full coverage for their eligible expenses. But how do you know if it’s right for your company?
Below we’ll take you through the types of stop-loss insurance policies, their pros and cons, and what you need to consider before choosing this type of insurance for your organization.
What is stop-loss insurance?
Stop-loss insurance, or excess insurance, is coverage an employer purchases alongside a self-funded health plan. It protects employers against catastrophic or surprise expenses, also known as “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, an insurance company pays for employees’ medical claims in exchange for monthly premium payments made by an employer. With a self-funded plan, the employer sets aside funds that will pay all eligible claims their employees incur while covered under the health plan.
Stop-loss insurance protects employers against health claims that exceed a predetermined amount. The amount is typically the point where benefit claims are considered excessive. This way, employees still receive essential coverage, and employers are protected financially against unexpected healthcare costs.
How does stop-loss insurance work?
Insurers typically write stop-loss insurance through a trust. An employer who applies for coverage and is accepted becomes a participating employer in the trust and receives a plan document outlining the policy’s benefits.
Now, let’s get to how actual claims work under this coverage. Stop-loss insurance payouts use a reimbursement model. You’re responsible for paying all your employees' losses upfront while they’re on your plan.
Afterward, you’ll receive reimbursements from your insurer for the amount of the loss that exceeds the deductible or predetermined amount. Payments 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:
- It must be an approved eligible expense as defined in your benefit’s plan document
- The loss must meet the definition of a loss outlined in your policy
Your plan document is critical to understanding your financial liability. For example, a stop-loss carrier may have policies that don’t allow reimbursement for certain expenses. This can result in significant liability for you, so use the policy’s flexible plan design options to create and review your plan document carefully.
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. Let’s discuss how each type can work for you.
Specific stop-loss insurance
Specific, or individual, stop-loss insurance provides employer protection for a particular 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. The policy reimburses you for the excess if a single claim exceeds that amount.
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 between $10,000 and $1 million. But your carrier will outline the maximum liability they’re willing to take on in your policy’s contract terms.
Aggregate stop-loss insurance
Aggregate stop-loss insurance covers excessive medical claims that come from all employees during a policy year. Medical, dental, vision, prescription drugs, and short-term disability claims can count toward the aggregate limit under this type of insurance.
With this coverage, you receive reimbursements if your employees’ aggregate claims exceed your predetermined threshold or aggregate attachment point.
The aggregate attachment point is your entire employee group’s maximum claim liability. This amount is determined based on aggregate factors but typically comes to about 125% of expected medical claims for the year.
You can calculate your aggregate attachment point level using the following method:
- You and your insurer determine the average expected monthly claims per employee.
- Multiply the amount by a percentage between 125% and 175% to generate a margin.
- You then multiply the final amount by your plan’s monthly enrollment to get the aggregate attachment threshold or monthly deductible limit.
The monthly stop-loss deductible will usually vary as your plan’s enrolled employees change. With an annual deductible, the amount you pay depends on initial monthly estimates during coverage, which the insurer totals for the year.
However, many policies offer lower annual deductibles than the totaled yearly deductible amount.
What are the pros of stop-loss insurance?
If you have a self-funded health benefit or are thinking about getting one, there are many advantages to adding stop-loss insurance coverage to your plan.
Some pros to having stop-loss insurance are:
- Financial stability: It protects you 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 pool for your company.
- Flexibility: You can use specific and aggregate policies as individual coverage or bundle them together. You can add them to your current health plan or purchase them 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 stop-loss insurance policies.
Some cons to having stop-loss insurance are:
- Initial payments: You receive reimbursements for excess medical claims. But you’re responsible for each claim’s initial cost. You may wind up in financial distress if you don’t have money in your budget for potential claims.
- 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 health reimbursement arrangement (HRA), your employees can receive tax-free reimbursements for their health insurance premiums and other out-of-pocket medical expenses. While they are considered self-funded plans, 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 you only reimburse them 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.
How to determine if stop-loss insurance is the right choice for your organization
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, and you offer a self-funded plan, your financial risk for costly claims is much lower. If an employee has a health emergency, your stop-loss coverage can bridge the gap without breaking the bank.
However, if your workforce is mostly older individuals or those with families, you may experience a higher frequency of claims. In this case, you might decide that waiting for reimbursements isn’t worth the initial, expensive claim payouts.
If you have the financial strength for stop-loss coverage and self-funded insurance, compare policies at multiple insurers before you choose one. Companies with self-funded health plans typically purchase specific and aggregate coverage. But with each type, stop-loss premiums and benefits can vary.
As with any other insurance policy, you can 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 your and your employees’ needs.
Stop-loss insurance can be attractive 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. Before getting started, speak with an insurance broker to help you understand your employees’ healthcare needs and your company’s potential financial burden.
This article was originally published on November 2, 2022. It was last updated on August 16, 2023.